Yesterday, we wrote "the release of the ADP Employment Report in the morning could provide some directional guidance because that data tends to be a preview of things to come in the Employment Situation Report (released Friday morning at 8:30am)." 

Today, we've seen what borders on a worst-case-scenario transpire with respect to that data.  Rates moved up, and they moved up sharply.  Let's examine how that happened and what the implications are going forward.

It all boils down to NFP (shorthand abbreviation for the Employment Report stemming from the "non farm payrolls" component).  At first glance, that seems odd considering it is not yet Friday morning!  But considering that Friday's report not only is the first major econ data that arrives after the markets are assumed to be getting back up to speed following the holiday season AND that the previous employment report was mostly disregarded as we approached year end, the significance is huge.

So it stands to reason that anything that presented a preview of how NFP might shake out,  might also rattle rates in advance of the official report itself, especially if the preview data was a real shocker.

And that is exactly what happened this morning.  It's not that the market came into today with the intention of placing early bets on NFP, but the fact that the moderately correlated ADP report came out with a shockingly high amount of job creation was more than enough for markets to begin that process. Read shocking at 3x what the market was expecting. 

As you may be aware already, in general, implied economic strength tends to bring about higher mortgage rates, so the huge upside surprise on this early indicator of the highly anticipated official jobs report goes a long way toward suggesting continued acceleration in economic growth (from very low levels), especially in an environment where jobs are so important to that outlook. This had a foul effect on mortgage rates today.

This selling of benchmark Treasuries led to big changes in the price of the mortgage backed securities that ultimately dictate your mortgage rate quotes.  Lenders actually circled around the block for the 2nd round of reprices for the worse this afternoon.  REMEMBER: When lenders reprice for the worse, the closing costs associated with specific mortgage rates quotes move higher, effectively raising the interest rate required in order to keep the same closing costs.

While "best execution" mortgage rate quotes at various lenders became even more stratified in all the hustle and bustle of reprices for the worse,  rates of 4.75 or 4.875 are still the best bets at a majority of lenders, just as they were yesterday.  This does NOT mean, of course, that rates stayed the same.  It's merely the "sweet spot" where moving up to 5.0 from 4.875 (or in some cases from 4.75 to 4.875) nets only marginal savings versus a similar .125% move up in rate from 4.75 (or 4.625 at some lenders). 

This means that if you were looking at the same best execution rates yesterday that the "penalty" of today's market action is HIGHER COSTS to get that rate.  For instance, in that 4.75 to 4.875 range, costs have increased .60 to .875 of one percent of the loan amount ($600 to $875 for every $100,000 of loan amount).  There are some outlying lenders that don't fall into this range, but a majority do.  For FHA/VA 30yr fixed loans the best execution also remains around 4.625-75% with diminishing returns for buying your rate up higher.

(NOTE: The stratification of lender offerings on this volatile day makes it necessary to point out that some lenders may not ascribe to this general consensus range.  If unsure, you should always examine the change in costs between rates you're considering)

The bottom line with respect to all this best-ex discussion is that the same analysis applies today as we wrote on Monday, only with higher closing costs:

4.875% is "Best Execution" for very well-qualified borrowers seeking a conventional 30 year fixed home loan. 4.75% is best execution on FHA/VA 30 year fixed loans. Some loan officers have gotten upset with us for saying 4.625% FHA was "Best Execution". This is as good as it gets but we still find ourselves swimming in sea of random rate quotes.  The primary mortgage market is very segmented at the moment. In reality, the best execution 30 year fixed mortgage rate is in a range between 4.75% and 5.125% with definite chances of phantom offers (very-well qualified borrowers) as low as 4.625% on FHA  (4.75% on Conventional loans) and as high as 5.25%. Phantom = elusive. We keep hearing whispers of these quotes but have yet to see proof of aggressive buydown structures.

Important Mortgage Rate Disclaimer: "Bext Execution" is the most efficient combination of note rate and points paid at closing. This note rate is determined based on the time it takes to recover the points you paid at closing (discount) vs. the monthly savings of permanently buying down your mortgage rate by 0.125%. Loan originators will only be able to offer these rates on conforming loan amounts to very well-qualified borrowers who have a middle FICO score over 740 and enough equity in their home to qualify for a refinance or a large enough savings to cover their down payment and closing costs. If the terms of your loan trigger any risk-based loan level pricing adjustments (LLPAs), your rate quote will be higher. If you do not fall into the "perfect borrower" category, make sure you ask your loan originator for an explanation of the characteristics that make your loan more expensive. "No point" loan doesn't mean "no cost" loan. The best 30 year fixed conventional/FHA/VA mortgage rates still include closing costs such as: third party fees + title charges + transfer and recordation + escrows (things like upfront MIP (if required), property taxes, homeowners insurance, accrued interest.