What’s driving current mortgage rates?
Average mortgage rates rose yesterday, as we predicted. It wasn’t a large increase, and, if you ignore Wednesday (which you can’t), they’re still at their lowest in a month. Indeed they remain close to their lowest in more than 15 months.
Many would urge you to grab your gains with both hands and lock your rate soon. They argue that it would take dire news to drive rates much lower. And that’s sensible advice. But there is plenty of potential for more dire news, especially over the U.S.-China trade dispute (see below). Even news from the U.K. concerning Brexit is influencing markets today. So, if you have strong nerves, you may prefer to hang on to wait and see. But, if you do so, you have to recognize the high levels of risk involved.
The data below the rate table are indicative of mortgage rates falling today. Of course, at volatile times such as these, the chances of that prediction being overtaken by events are even higher than usual. Indeed, moments before this article was published, the consumer sentiment index was released. And that was better than expected. So those events may already be catching up with that prediction.
|Conventional 30 yr Fixed||4.125||4.125||+0.06%|
|Conventional 15 yr Fixed||3.625||3.625||Unchanged|
|Conventional 5 yr ARM||4||4.583||-0.02%|
|30 year fixed FHA||3.625||4.612||Unchanged|
|15 year fixed FHA||3.563||4.512||Unchanged|
|5 year ARM FHA||3.625||5.037||Unchanged|
|30 year fixed VA||3.75||3.925||Unchanged|
|15 year fixed VA||3.688||4||Unchanged|
|5 year ARM VA||3.688||4.269||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 mortgage rates that are moderately lower today. By approaching 10:00 a.m. (ET), the data, compared with this time yesterday, were:
- Major stock indexes were all somewhat lower soon after opening (good for mortgage rates). When investors are buying shares they’re often selling bonds, which pushes prices of Treasuries down and increases yields and mortgage rates. The opposite happens on days when indexes fall. See below for a detailed explanation
- Gold prices fell to $1,280 from $1,291. (Bad 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 $63 a barrel (neutral for mortgage rates, because energy prices play a large role in creating inflation)
- The yield on 10-year Treasuries edged down to 2.39 percent from 2.41 percent. (Good for borrowers). More than any other market, mortgage rates tend to follow these particular Treasury yields
- CNNMoney’s Fear & Greed Index for inched up to 36 from 35 out of a possible 100. It was up at 71 this time last month. (Bad (but only a bit) 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
If nothing changes in coming hours, today might be a better day for mortgage rates.
Although it was less prominent in headlines yesterday, the U.S.-China trade dispute remains of vital concern to markets. Overnight, Reuters reported that most respondents in a poll of economists it conducted believe that it increases the risk of a U.S. recession. Also overnight, the South China Post said China was canceling an order for 3,247 metric tonnes of American pork.
Markets seem unable to fathom President Trump’s unusual negotiating tactics. On Wednesday, his administration announced restrictions on foreign telecom-equipment suppliers. Many see this as primarily a ban on Chinese company Huawei and perceive it as an escalation in the dispute. But, earlier in the week, he was making soothing remarks about the prospects for a resolution. Quoted by ABC News, he called it a “little squabble” on Tuesday. And a day earlier, he held out hope of more progress in the continuing talks, telling journalists: “We’ll let you know in three or four weeks if it’s successful,” according to NBC News.
Of course, America has the stronger economy. And it’s probably better positioned to win any trade war with its principal rival. But, as with real, shooting wars, it’s not that straightforward. To start with, China is not a democracy and its leadership is subject to fewer pressures from politicians, public opinion and the media. Secondly, the cost of winning is likely to be considerable. And, thirdly, China is a major lender nation to the United States and has financial tools it could use to exert leverage. For example, a mass sell-off of U.S. Treasury bonds — or even a pause in purchasing new ones — could disrupt our ability to borrow.
A glimmer of hope?
By now, both sides presumably recognize that they’re in uncomfortable positions. However, they’ve also maneuvered themselves into situations where concessions are bound to be perceived domestically as weaknesses and failures. One possible scenario, which was floated on Monday, might provide a way forward. This sees the two leaders, Presidents Trump and Xi, take personal charge of negotiations. Between them, they should be able to construct a deal that carefully balances concessions with enough face-saving that each can sell the outcome back home as a win. A scheduled G20 summit at the end of next month would be a great opportunity to unveil such a deal. Perhaps President Trump had that event in mind when he made his promise on Monday to let journalists know “in three or four weeks” if progress is made.
Of course, there’s no guarantee the two heads of state will be successful. On Monday, CNN suggested, “A personal duel between two rival presidents could ensure that the escalating trade war across the Pacific may last longer than anyone expected.”
Until a deal or a truce is struck, the dispute is likely to be a drag on the global economy that hits America and China especially hard. And that, in turn, is likely to exert downward pressure on mortgage rates. That’s not to say they won’t sometimes move up in response to other factors. But this trade war may well set a new direction that eventually emerges as a downward trend. However, any reduction in China’s buying of American government debt would likely have the opposite effect.
Rate lock recommendation
Why mortgage rates have been out of synch
Last week, we promised to let you know if we heard a convincing explanation for why mortgage rates have recently drifted apart from yields on 10-year Treasury bonds. The two usually have a close relationship.
On Wednesday, Mortgage News Daily (MND) offered one — together with a colorful simile. Think of that relationship as being like a dog (rates) and its master (yields). Usually, the dog trots happily alongside its owner’s heels. But sometimes it rushes ahead, pulling on the leash and trying to drag the human along. At other times, it sits obstinately and resists attempts to budge it. It’s recently been in obstinate mode.
Yes, but why? Well, MND reckons it’s “owing to some abstruse loan performance data that made investors rethink the value they were placing on mortgage investments.” In other words, those investors have been questioning whether they’re being adequately compensated for the extra risk they shoulder when they buy mortgage-backed securities rather than U.S. Treasury bonds.
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.
That latest Fed announcement on interest rates 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
It’s been another relatively light week for economic reports. The two most likely to affect markets were published on Wednesday. This morning’s consumer sentiment index was published too close to our deadline for us a assess its impact on markets.
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.
- Monday: April survey of consumer expectations (consumers expect inflation to be at 2.6 percent in a year’s time, down from 2.8 percent in the last report)
- Tuesday: Nothing
- Wednesday: April retail sales (actual -0.2 percent; forecast +0.2 percent) and retail sales excl. autos (actual -0.1 percent; forecast +0.7 percent). Plus April industrial production (actual -0.5 percent; forecast -0.1 percent) and capacity utilization (actual 77.9 percent; forecast 78.6 percent)
- Thursday: (both annualized) April housing starts (actual 1.235 million homes; forecast 1.209 million) and April building permits (actual 1.296 million permits; forecast 1.291 million)
- Friday: May consumer sentiment index (actual 102.4 points; forecast 97.0 points)
Although this has been a light week, next week has even fewer reports scheduled.
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.