What’s driving current mortgage rates?
Average mortgage rates held yesterday, which was in line with our prediction. They closed pretty much exactly where they were a week earlier.
This morning’s glittering employment situation report should change that. It was much better than expected. And, following on from yesterday’s impressive productivity figures, these data would normally push mortgage rates up. But, at least so far, they haven’t.
Indeed, the data below the rate table are indicative of mortgage rates falling today. However, don’t discount the possibility of markets waking up during the day and smelling this morning’s coffee. If that happens, those rates might rise.
|Conventional 30 yr Fixed||4.188||4.188||Unchanged|
|Conventional 15 yr Fixed||3.808||3.808||Unchanged|
|Conventional 5 yr ARM||4.125||4.66||+0.02%|
|30 year fixed FHA||3.75||4.738||Unchanged|
|15 year fixed FHA||3.688||4.638||Unchanged|
|5 year ARM FHA||3.688||5.104||Unchanged|
|30 year fixed VA||3.75||3.924||-0.12%|
|15 year fixed VA||3.75||4.063||Unchanged|
|5 year ARM VA||3.875||4.381||Unchanged|
|Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here.|
Financial data affecting today’s mortgage rates
First thing this morning, markets looked set to deliver lower mortgage rates today. By approaching 10:00 a.m. (ET), the data, compared with this time yesterday, were:
- Major stock indexes were all moderatly higher soon after opening (bad for mortgage rates). When investors are buying shares they’re often selling bonds, which pushes prices of Treasuries down and increases yields. See below for a detailed explanation
- Gold prices bounced back to $1,280 from $1,270. (Good for mortgage rates) In general, it’s better for rates when gold rises, and worse when gold falls. Gold tends to rise when investors worry about the economy. And worried investors tend to push rates lower)
- Oil prices held steady at $62 a barrel (neutral for mortgage rates, because energy prices play a large role in creating inflation)
- The yield on 10-year Treasuries held steady 2.52 percent. (Although that would usually be neutral for borrowers, by this morning yields were falling, which is good for borrowers). More than any other market, mortgage rates tend to follow these particular Treasury yields
- CNNMoney’s Fear & Greed Index edged up to 65 from 62 out of a possible 100. (Bad for borrowers. “Greedy” investors push bond prices down (and interest rates up) as they leave the bond market and move into stocks, while “fearful” investors do the opposite. So lower readings are better than higher ones
Unless things change, and markets return to playing by the usual rules, today might be a better day for mortgage rates.
Rate lock recommendation
Consider buying discount points
Mortgage News Daily (MND) made a good case recently for purchasing discount points. For some borrowers, these are currently unusually cheap and represent good value. However, not all lenders are offering these bargains and their availability may change with market conditions. So you should explore your options with your loan officer or another professional.
Here’s MND’s thinking: “… for most lenders, it makes almost no sense to lock a rate of 4.25% or 4.75% today (assuming a conventional 30yr fixed…) because the cost to buy down to 4.125% and 4.625% respectively is so much smaller than normal.”
Trends are impossible to discern from just a few days’ changes. So don’t read too much into recent fluctuations. Frustrating though it is, there really is no way of knowing immediately what movements over a brief period mean in their wider context.
Even when one’s discernable, trends in markets never last forever. And, even within a long-term one, there will be ups and downs. Eventually, at some point, enough investors decide to cut losses or take profits to form a critical mass. And then they’ll buy or sell in ways that end that trend. That’s going to happen with mortgage rates. Nobody knows when or how sharply a trend will reverse. But it will. That might not be wildly helpful but you need to bear it in mind. Floating always comes with some risk.
Of course, it’s possible the Federal Reserve’s March statement on rates has established a long-term downward trend. But you can still expect to see rises and falls (such as those over the last several weeks) within it as other risk factors emerge and recede. And, depending on how near you are to your closing date, you may not have time to ride out any increases.
Risks from a future recession
Of course, a recession couldn’t, by definition, arise before you close. But the more investors suspect there’s one on the horizon, the lower mortgage rates are likely to go.
Last Friday’s better-than-expected GDP figures should have provided markets with some respite from such fears. But they didn’t react positively to the data. That day’s New York Times suggested why that might be the case:
Economists warned that the [GDP] report was inflated by short-term factors and probably overstated the underlying pace of growth. Most anticipate a downshift as the year progresses, and hardly any independent economists expect that President Trump will be able to deliver the 3 percent growth he has promised this year.
So, amid conflicting economic data, markets seem unable to make up their minds what the future holds. If and when they do, mortgage rates could rise (on optimism) or fall (on pessimism).
Meanwhile, markets are regaining focus on current U.S.-China trade talks. Both sides have worked long (President Trump’s original deadline passed many weeks ago) and hard to iron out problems.
There are now signs the U.S. may be making concessions. U.S. Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer are currently in Beijing for the latest round of talks. And, on Wednesday night, the South China Morning Post cited reports that:
… Trump has softened his administration’s opening negotiating position from what it originally characterised as “Chinese government-conducted, sponsored, and tolerated cyber intrusions into US commercial networks”… Since trade talks resumed in December, Washington and Beijing say they have made gains on various issues, including intellectual property, forced technology transfer and non-tariff barriers. But an enforcement mechanism and punitive tariffs remain sticking points.
Certainly, both sides badly need a good outcome, and for similar reasons: First, to burnish political prestige domestically by bringing home a win. And secondly, to step back from economic slowdowns.
However, some worry those pressures will prevent a win-win conclusion — and might even result in no deal being reached or a lose-lose one. Once the talks end, investors will digest the outcome in detail. If no deal is concluded, or if the one that’s agreed turns out to be worse than neutral for the U.S., expect mortgage rates to tumble. But, if it’s a win-win — or even just not too terrible and simply brings uncertainty to an end — they could rise.
Wednesday’s Fed announcement didn’t move policy on from that declared after March’s meeting. That was doveish and ruled out further rate hikes this year And it will likely continue to add some downward pressure on mortgage rates in coming months. As we’ve seen in recent weeks, that doesn’t mean there aren’t other risks (currently known and unknown) that could see them rise, possibly sharply. We suggest that you lock if you’re less than 30 days from closing.
Of course, financially conservative borrowers might want to lock immediately, almost regardless of when they’re due to close. On the other hand, risk takers might prefer to bide their time. Only you can decide on the level of risk with which you’re personally comfortable.
If you are still floating, do remain vigilant right up until you lock. Continue to watch key markets and news cycles closely. In particular, look out for stories that might affect the performance of the American economy. As a very general rule, good news tends to push mortgage rates up, while bad drags them down.
When to lock anyway
You may wish to lock your loan anyway if you are buying a home and have a higher debt-to-income ratio than most. Indeed, you should be more inclined to lock because any rises in rates could kill your mortgage approval. If you’re refinancing, that’s less critical and you may be able to gamble and float.
If your closing is weeks or months away, the decision to lock or float becomes complicated. Obviously, if you know rates are rising, you want to lock in as soon as possible. However, the longer your lock, the higher your upfront costs. On the flip side, if a higher rate would wipe out your mortgage approval, you’ll probably want to lock in even if it costs more.
If you’re still floating, stay in close contact with your lender, and keep an eye on markets. I recommend:
- LOCK if closing in 7 days
- LOCK if closing in 15 days
- LOCK if closing in 30 days
- FLOAT if closing in 45 days
- FLOAT if closing in 60 days
This has been one of the hotter weeks for economic data. True, few reports were likely to affect markets much by themselves, although this morning’s official employment situation report was a definite exception. But many second-tier reports were published, too. Nevertheless, by the end of this week, investors seem to have no better feel for the underlying direction of the economy than they had Monday morning.
Markets tend to price in analysts’ consensus forecasts (below, we use those reported by MarketWatch) in advance of the publication of reports. So it’s usually the difference between the actual reported numbers and the forecast that has the greatest effect. That means even an extreme difference between actuals for the previous reporting period and this one can have little immediate impact, providing that difference is expected and has been factored in ahead. Although there are exceptions, you can usually expect downward pressure on mortgage rates from worse-than-expected figures and upward on better ones. However, for most reports, much of the time, that pressure may be imperceptible or barely perceptible.
This morning’s official employment situation report was way better than expected. Not only was the number of new jobs in April higher than expected, but the unemployment rate dropped to 3.6 percent. Average hourly earnings grew at the same rate as in March. In other news, even March’s trade deficit in goods didn’t widen as much as analysts had forecast. Data for April’s ISM nonmanufacturing index were published too close to our deadline for us to assess their impact on markets.
- Monday: March numbers for personal income (actual +0.1 percent; forecast +0.4 percent), consumer spending (actual +0.9 percent; forecast +0.8 percent) and core inflation (actual 0.0 percent; forecast +0.1 percent)
- Tuesday: employment cost index for the first quarter (actual +0.7 percent; forecast +0.7 percent) and the consumer confidence index for April (actual 129.2 points; forecast 126.6 points)
- Wednesday: April ISM manufacturing index (actual 52.8 percent; forecast 54.8 percent) and March construction spending (actual -0.9 percent; forecast -0.2 percent). Also, 2:00 p.m. (ET) statement and 2:30 p.m. press conference following FOMC meeting
- Thursday: First quarter productivity (actual +3.6 percent; forecast +2.8 percent) and unit labor costs (actual -0.9 percent; forecast +0.7 percent). Plus March factory orders (actual +1.90 percent; forecast +1.6 percent)
- Friday: April employment situation report, including nonfarm payrolls (actual +263,000 jobs; forecast +190,000 jobs), unemployment rate (actual 3.6 percent; forecast 3.8 percent) and average hourly earnings (actual +0.2 percent; forecast +0.2 percent). Also March advance trade in goods (actual -$71.4 billion; forecast -$73.0 billion) and April ISM nonmanufacturing index (actual 55.5 percent; forecast 57.5 percent)
That’s a heavy schedule for one week.
What causes rates to rise and fall?
Mortgage interest rates depend a great deal on the expectations of investors. Good economic news tends to be bad for interest rates because an active economy raises concerns about inflation. Inflation causes fixed-income investments like bonds to lose value, and that causes their yields (another way of saying interest rates) to increase.
For example, suppose that two years ago, you bought a $1,000 bond paying 5 percent interest ($50) each year. (This is called its “coupon rate” or “par rate” because you paid $1,000 for a $1,000 bond, and because its interest rate equals the rate stated on the bond — in this case, 5 percent).
- Your interest rate: $50 annual interest / $1,000 = 5.0%
When rates fall
That’s a pretty good rate today, so lots of investors want to buy it from you. You can sell your $1,000 bond for $1,200. The buyer gets the same $50 a year in interest that you were getting. It’s still 5 percent of the $1,000 coupon. However, because he paid more for the bond, his return is lower.
- Your buyer’s interest rate: $50 annual interest / $1,200 = 4.2%
The buyer gets an interest rate, or yield, of only 4.2 percent. And that’s why, when demand for bonds increases and bond prices go up, interest rates go down.
When rates rise
However, when the economy heats up, the potential for inflation makes bonds less appealing. With fewer people wanting to buy bonds, their prices decrease, and then interest rates go up.
Imagine that you have your $1,000 bond, but you can’t sell it for $1,000 because unemployment has dropped and stock prices are soaring. You end up getting $700. The buyer gets the same $50 a year in interest, but the yield looks like this:
- $50 annual interest / $700 = 7.1%
The buyer’s interest rate is now slightly more than seven percent. Interest rates and yields are not mysterious. You calculate them with simple math.
Mortgage rate methodology
The Mortgage Reports receives rates based on selected criteria from multiple lending partners each day. We arrive at an average rate and APR for each loan type to display in our chart. Because we average an array of rates, it gives you a better idea of what you might find in the marketplace. Furthermore, we average rates for the same loan types. For example, FHA fixed with FHA fixed. The end result is a good snapshot of daily rates and how they change over time.