Why Timing Interest Rate Locks Never Works

Borrower Refuses to Lock!

We have a borrower who did not want to lock this week because “rates are on a downward trend.”

He is totally correct about the trend, but utterly wrong about not locking.

This is because it is impossible to time the market and because rates never move in a straight line (they bounce up and down no matter what the trend is).

Rates bounce up and down because the market reacts (sometimes violently) to even the slightest bit of news.

And – that is what happened today, as the market reacted to a better-than-expected jobs report (“good economic news”) and rates went up.

Good News = Higher Rates; Bad News = Lower Rates

Remember – good economic reports and/or signs of inflation tend to push rates higher (because both types of news portend a more “hawkish” Fed that is more willing to raise rates or less likely to cut rates, and such news portends higher rates in general).

And – bad economic reports or signs of deflation or disinflation tend to push rates lower.

I often blog about the folly of trying to time the housing market, as we have seen numerous buyers get badly burned.

HERE is my most recent blog from May, where I pointed out that Warren Buffett never times anything, and that hedge funds were still buying homes in droves while we had a client “waiting for the market to correct” because he thought he had a better pulse on the market than the hedge funds.

This same advice goes for borrowers timing their interest rate locks too.

Even if they are following the most up-to-date macro data, they need to remember that a single jobs, inflation, GDP, consumption, or consumer sentiment report can send rates spiraling either up or down. And – if they are following press reports about interest rates, they need to remember that such reports often lag what is happening in the market currently – sometimes by as much as a week – making the press reports worthless in any case.

If borrowers are following the advice of “experts,” they might be wise to remember that even experts often get it wrong – as I remind readers in this blog, in which I talk about a brilliant oil trader who lost tens of millions trying to time the oil market.

Over the long run, there are some macro experts who have been amazingly accurate over the last few years, and I cite them often in blogs.

BUT, ALL of those experts remind us over and over that prices and rates never move in a straight line, and that short run timing is often a fool’s game.

And – we of course have seen hundreds of buyers over the years get horribly burned because they refused to lock in their rates – believing they would fall.

My final reminder is this: borrowers can always lock in a refinance four months after they close if rates happen to fall.

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