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'Predicting' Mortgage Interest Rates

Dan Green over at The Mortgage Reports hits on an interesting topic and trend, the speculation of mortgage rate futures. Interest rates have evolved to sprout ‘commodity’ features with the advent of the $6.1 Trillion dollar value Mortgage Backed Securities (MBS) market. The MBS has created liquidity and relative volatility for a typically illiquid security, making it prime for speculation. More...Inside players are using technical, psychological, and mash-up strategies to make their predictions much like the Buffet, Soros, and Lynch, loyal speculators of the stock markets. Barry Habib offers a fine service called the Mortgage Market Guide (MMG). Part of their service broadcasts live candlestick charts fueled by MBS intraday trading prices. Barry teaches subscribers to watch for ‘patterns’ in his charts that have names like The Morning Star and The Inverted Cross that are purported indicators of pending change (sorry if I didn’t get the names exactly right Barry). While I must confess, I didn’t study the charts to the degree that I could predict a pricing change based on patterns in charts, I did pay close attention to a few, easy to track economic and MBS market indicators. You may Google any of the report names for detailed explanations and actual release dates.

  • Jobless Claims Report
  • Non-Farm Payroll Report
  • New Residential Housing Starts
  • Consumer Price Index
  • Intraday support and resistance price barometers for MBS bonds

On the short term, each of these indicators will affect rate pricing by either exceeding or falling short of ‘expert analysts’ predictions, literally within 30 minutes of the reports release. For example, if the Jobless Claims Report (JCR) is predicted to be 300,000 and the real number turns out to be 280,000, this would be a direct indication of a stronger than anticipated job market, which translates into a stronger economy, which translates into ‘inflationary economic conditions’. ‘Inflationary Conditions’ = pricing for the worse or rising mortgage rates. Conversely, if the JCR turned out to be 320,000, more people are unemployed than expected, the economy is soft, pricing improves and rates drop. The same dynamic works similarly for all four economic reports, with varying degrees of impact. Intraday resistance is a forecasted price level where the rate of exchange should encounter selling pressure, which should stop the price/rate from rising any further. Support is a forecasted price level where the rate of exchange should encounter buying pressure, which should stop the price/rate from falling any further. Speculators look for resistance and support levels to place orders and thus they become, to a large degree, self-fulfilling prophecies. (Definitions provided by HiFX).

Although self-fulfilling prophecies don’t seem to have a place in speculation, they most certainly do. Typically, once these resistance and/or support levels are breached, a volatile buy or sell pattern ensues, affecting pricing and rates accordingly (buying = better pricing/lower rates, selling = worse pricing/higher rates). For a long term view, one need only ‘zoom out’ and view these reports from a wider date range and ‘watch the trends’ OR pay attention to the Federal Reserve Boards, Fed Funds Rate adjustment policy. The FOMC takes into consideration the above economic indicator reports (amongst other factors) when making their decision on increasing, decreasing or ‘pausing’ the movement of the FFR. Dan took to speculating the FOMC’s recent pauses as a psychological play by the Fed, which seems plausible. While the FFR movement influences some mortgage rates directly, such as a Home Equity Lines, it is truly more of a general economic indicator. Hopefully this information can somewhat tame and explain the arduous process of predicting mortgage rate futures. If you don’t care to follow economic indicator reports in relation to mortgage rate futures but would like to listen to people who do, Bankrate.com enlists a panel of ‘experts’ to weigh in on the matter.
Comment balloon 0 commentsJeff Corbett • October 13 2006 03:27PM
'Predicting' Mortgage Interest Rates
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Dan Green over at The Mortgage Reports hits on an interesting topic and trend, the speculation of mortgage rate futures. Interest rates have evolved to sprout ‘commodity’ features with the advent of the $6. 1 Trillion dollar value Mortgage Backed… more
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