Mortgage Rates: Don't Try Timing Them

When I first got into the real estate industry, there were a few benchmark economic reports that clearly influenced the direction of mortgage rates. Today things are not so simple.

The velocity of capital in the financial markets runs at warp speed and so does change to underlying markets, including mortgage rates. Headline risk, the risk that news headlines will impact rates, also plays a significant role, further influencing markets and mortgage rates with volatility.

Thus predicting the future of mortgage rates has become an exercise in futility -- more of a guessing game than refined economic analysis. You don't have to take my word for it: Just ask the so-called experts.
Dan Green is an accomplished practicing mortgage banker, a mortgage rate prognosticator for, and a friend of mine. Each week, he and a panel of other experts are asked to predict what mortgage rates will do over the next seven days -- move up, move down or remain unchanged.

Over the past few months, I've ribbed Dan that he (and that no one) really has no idea where mortgage rates are going to be tomorrow let alone over the next week for the reasons above. I'm also bemused at the increasing number of folks on the expert panel who essentially punt by representing that rates will remain 'unchanged'. Mortgage rates change every day, sometimes as often as five times a day -- but I digress.

Dan is a professional. He owns up to his responsibility, studies all the right data and offers his educated prediction to the folks at Bankrate. According to Dan, he's correct
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approximately 50 percen of the time, which means he is also wrong half of the time. While that may be outstanding if you're hitting a baseball for a living, it's no better than flipping a coin when it comes to predicting the movement of mortgage rates. Thing is, Dan's far more accurate than most. He bravely points out the Bankrate panel of experts, as a whole, are wrong 82 percent of the time.

This brings up some confidence and accountability issues. If a panel of experts are wrong 82 percent of the time, it would seem smart to do exactly the opposite of what they are recommending as a whole. Not good for consumer confidence.

In regards to accountability, I have a theory as to why the panel is wrong so often. It behooves the experts to predict mortgage rates will rise or remain unchanged, and thus encourage consumers to lock their rates. A locked rate equals a commitment to close within a certain timeframe by the consumer and revenue for the mortgage professional. Predicting rates will fall extends the sales cycle and eats into the mortgage professionals profitability. So there would seem to be quite the self-serving dynamic going on here -- granted not all of the time, but enough to not be good for perceived professional accountability.

We tend to be fascinated with predictions, the art and science of accurately 'seeing' the future dates back centuries. Pundits and other talking heads make a living analyzing copious amounts of data, attempting to spot trends that have historically been leading indicators to future change in regards to any number of different matters.

Predicting the future of mortgage rates is no different. "Experts" pore over economic reports, real-time financial market data and rub their crystal balls all in attempt to predict where mortgage rates are headed. The stated benefit to the consumer is valuable advice on when to 'lock' or 'float' their interest rate.

If mortgage rates are predicted to trend downward one would want to 'float', or don't' take any action, in hopes of getting a lower rate or better pricing on a given rate. If they are predicted to trend up, one would want to "lock" the current rate before they rise and/or get more expensive.

So what should you do as a consumer in these times of uncertainty?
  • First, ignore the experts' general advice.
  • Second, use the information in this article when vetting a mortgage professional and determine if they truly understand how today's market works.
  • Third, get qualified and all required documentation in to your trusted mortgage professional in a (very) timely fashion so that you are in position to lock a rate and move to close when the time is right.
  • Finally, discuss your very individual situation as it pertains to the risks of floating and locking. With über-tight underwriting standards, a quick rise in rates may increase your payment enough to disqualify you. The phrase 'penny wise and pound foolish' fits here, so don't be too greedy and risk sabotaging your qualification.

Truth be told, a mortgage professional who has a good grasp on economic reports and access to real-time market data will have about a 20-minute lead time when it comes to knowing which way rates are about to adjust. So adjust your expectations accordingly.

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