What’s driving current mortgage rates?
This column will not appear on Monday because that’s Memorial Day and a public holiday. We’ll see you again soon after 10:00 a.m. (ET) on Tuesday morning. Average mortgage rates moved down sharply yesterday, as we predicted. The fall was enough to take them to their lowest levels in more than a year.
Nothing much has changed since yesterday. There’s no sign of an imminent resolution of the US-China trade dispute. And Brexit’s gotten worse with the resignation announcement this morning of the British prime minister. Yet some markets seem to be having a change of sentiment this morning and are acting as if the economic news were better than it actually seems. It’s so far unclear why.
So the data below the rate table are indicative of mortgage rates rising today, perhaps appreciably. But, as always, that prediction may be overtaken by events.
|Conventional 30 yr Fixed||4.063||4.063||-0.06%|
|Conventional 15 yr Fixed||3.625||3.625||-0.12%|
|Conventional 5 yr ARM||3.875||4.526||-0.04%|
|30 year fixed FHA||3.625||4.612||-0.06%|
|15 year fixed FHA||3.563||4.512||-0.06%|
|5 year ARM FHA||3.563||5.036||Unchanged|
|30 year fixed VA||3.75||3.925||-0.06%|
|15 year fixed VA||3.688||4||-0.06%|
|5 year ARM VA||3.625||4.271||-0.02%|
|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 noticeably higher today. By approaching 10:00 a.m. (ET), the data, compared with this time yesterday, were:
- Major stock indexes were all 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 and mortgage rates. The opposite happens on days when indexes fall. See below for a detailed explanation
- Gold prices held steady at $1,281. (Neutral 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 fell to $58 from $59 a barrel (good for mortgage rates, because energy prices play a large role in creating inflation)
- The yield on 10-year Treasuries held steady at 2.33 percent. (Neutral for borrowers). More than any other market, mortgage rates tend to follow these particular Treasury yields
- CNNMoney’s Fear & Greed Index held steady at 29 out of a possible 100. It was up at 70 this time last month. (Neutral 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 worse day for mortgage rates.
Today’s drivers of change
US-China trade dispute
The US-China trade dispute may have faded from American headlines but yesterday’s Guardian suggested it’s still very much alive in Asian media:
Over the last week, China’s state media outlets have called the US government delusional, compared it to apes shouting on a river bank, and offered to teach the Americans a Chinese idiom: diandao heibai, “to invert black and white”, or deliberately distort the truth.
Here, the dispute’s effect on markets may be continuing in the shadows. Some blamed yesterday’s trading on it as much as (or more than) Brexit. And it certainly remains a source of deep concern. So, in the future, you can expect sharp reactions to both rhetoric and solid news, whether good or bad. We’ll return to more detailed coverage when necessary.
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, absent a resolution, 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.
Brexit is Britain’s exit (geddit?) from the European Union. That’s the world’s fifth biggest economy breaking away from the world’s largest trading bloc. Most economists expect the divorce to harm both — and to slow growth in the global economy. That’s why something that seems so distant has an effect on American mortgage rates.
This morning saw the announcement of the resignation of British Prime Minister Theresa May. She’s tried and failed to reach a political deal that extracts the UK with the minimum damage. But with an electorate, parliament and even her own cabinet split down the middle over leaving, she’s failed. Her successor will be elected by her party’s MPs (equivalent of members of Congress) and grassroots members. But it’s hard to see how that person will do much better. So Brexit may continue to be a drag on mortgage rates until it’s satisfactorily resolved. Just not today, apparently.
Rate lock recommendation
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. We’ll learn more about the thinking behind this policy this afternoon when the latest FOMC minutes are published. But 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 an unusually light week for economic reports, with none that usually moves markets far. Of course, any report can create waves if it contains sufficiently shocking data, but that seems unlikely today.
The minutes of the last meeting of the Federal Open Market Committee (FOMC) were published on Wednesday. The FOMC is the Federal Reserve body that sets that organization’s interest rates — and therefore many others — and so its minutes have the potential to affect markets severely. But the latest ones showed the committee renewing its commitment to its current patient approach to interest rate changes “for some time.” So markets hardly responded at all.
Today may be slower than normal as many investors and traders take that day to extend their Memorial Day long weekends. This column will not appear on Monday’s public holiday.
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: Nothing
- Tuesday: April existing home sales (annualized 5.19 million sales; forecast 5.35 million homes)
- Wednesday: FOMC minutes (see above)
- Thursday: May Markit flashes* for manufacturing purchasing managers’ index (PMI) (actual 50.6, a 116-month low) and services PMI (actual 50.9, a 39-month low). Plus April new home sales (annualized actual 673,000; forecast 670,000 homes)
- Friday: April durable goods orders (actual -2.1 percent; forecast -2.3 percent) and April capital goods orders (actual -0.9 percent; forecast -0.3 percent)
* A “flash” is an initial reading of figures that is subject to later revision.
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.