As many as 85% of new mortgagors are choosing fixed rates, says CAAMP. It makes you wonder, what is it going to take to get that number back to its historical average of ~65%?
For one thing, the fixed-variable spread (i.e., difference between fixed and variable rates) needs to widen. With today’s typical 5-year fixed at 2.84% and discounted variables at 2.45%, that spread is currently ~39 basis points.
As a rough rule of thumb, when the fixed-variable spread hits 100 basis points, demand for variables noticeably increases. Spreads are currently a ways off from that point, but we may inch closer this summer.
Despite prime rate being stuck at 3.00% for 1,000 days now, floating rates have slowly been improving. They’re being aided, in part, by falling short-term funding costs. The 1-year LIBOR (chart below) is a very rough proxy of these. (Click to enlarge – Chart by Quotemedia) The proof is in lender offers, and the latest comes from RMG Mortgages. Last week it launched a prime – 0.50% product (more on that below). That’s the biggest variable discount of any national lender since 2011, when they hit prime – 0.90% (or better). The fixed-variable spread is also widening because of slightly higher long-term rates. The 5-year yield (which leads fixed rates) hit a fresh 4-month high today at 1.53%, before falling 6 bps on concerning news that U.S. manufacturing contracted. (Click to enlarge – Chart by Investing.com) There’s no way to tell if the recent spurt up in bond yields has staying power. Considerable resistance lies above at the 1.55% to 1.60% level. Yields have been rebuffed twice before when attempting to pierce that range. Until they do, odds are low that 5-year fixed rates and the fixed-variable spread will increase significantly. More on RMG’s New “Low Rate Basic” Variable