What’s driving current mortgage rates?
Average mortgage rates fell yet again yesterday, confounding our prediction. It was the sixth successive business day that saw a drop. However, this latest one was tiny: the smallest measurable amount.
The chances of a bounce in rates grow by the day. However, President Trump’s announcement late yesterday of imminent tariffs on all imported goods from Mexico may delay it. And if reports of the possibility of a new front opening in the form of a trade war with the European Union turn out to be true, rising rates may be delayed yet further.
Certainly, any rise looks unlikely today. The data below the rate table are indicative of mortgage rates falling yet again today, possibly sharply. But, as always, that prediction may be overtaken by events.
|Conventional 30 yr Fixed||4||4||-0.06%|
|Conventional 15 yr Fixed||3.563||3.563||Unchanged|
|Conventional 5 yr ARM||3.813||4.485||Unchanged|
|30 year fixed FHA||3.5||4.486||-0.06%|
|15 year fixed FHA||3.5||4.449||Unchanged|
|5 year ARM FHA||3.438||4.968||-0.05%|
|30 year fixed VA||3.625||3.798||Unchanged|
|15 year fixed VA||3.625||3.937||Unchanged|
|5 year ARM VA||3.563||4.229||-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 lower today, perhaps appreciably. By approaching 10:00 a.m. (ET), the data, compared with this time yesterday, were:
- Major stock indexes were all sharply 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 rose to $1,303 from $1,284 an ounce. (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 fell to $55 from $59 a barrel (good for mortgage rates, because energy prices play a large role in creating inflation)
- The yield on 10-year Treasuries tumbled to 2.17 percent from 2.27 percent. (Good for borrowers). More than any other market, mortgage rates tend to follow these particular Treasury yields
- CNNMoney’s Fear & Greed Index fell to 23 from 25 out of a possible 100. It was up at 62 this time last month. (Good 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 particularly good day for mortgage rates.
Today’s drivers of change
The US-China trade dispute may be escalating, but the President is opening a fresh front. Yesterday, he unveiled new tariffs on goods imported from Mexico. They’d start at 5 percent from June 10 and could then “gradually increase,” ratcheting up to 25 percent. Meanwhile, Politico reported on Tuesday:
European Commissioner for Trade Cecilia Malmström warned the EU’s [European Union — the world’s largest trading bloc] trade ministers at a meeting on Monday that they need to steel themselves for U.S. President Donald Trump to hit billions of euros worth of European goods with tariffs, ramping up a decadeslong dispute over unwarranted subsidies for Airbus.
Markets hate trade disputes because they introduce uncertainty, dampen trade and are disruptive to established supply chains. Some fear a trade war on three fronts might be a drag on the global economy that hits America especially hard. And that fear, 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, such trade wars 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.
Inverted yield curve
You may have read about the inversion of the bond yield curve in April. And you may understandably have chosen to skip over that bit. But it’s back. And it might be important.
The jargon hides a simple phenomenon: Yields on short-term U.S. Treasury bonds are currently higher than those for long-term ones. So a couple of days ago, you could get a yield of 2.35 percent on a 30-day Treasury bill but 2.22 percent on a 10-year one. And that’s highly unusual. Normally, you get a higher return the longer you’re locked into an investment.
The problem is, inverted bond yields have come to be seen as harbingers of economic gloom. When we last reported on this in April, we quoted CNBC:
The U.S. Treasury yield curve has inverted before each recession in the past 50 years and has only offered a false signal just once [in 1998] in that time, according to data from Reuters.
However, on Wednesday, CNBC quoted Fundstrat’s Tom Lee as suggesting, “this time could be different.” So it’s too soon to panic. But some are getting the jitters.
Treasuries and mortgage rates
You may remember that we recently stole a simile from Mortgage News Daily. Mortgage rates are like dogs while yields on 10-year Treasury bonds are like their owners. Mostly, mortgage rates trot happily along on their leashes at their human’s heels. But sometimes they run ahead, dragging the owner along. Other times they sit stubbornly and have to be dragged along.
Recently, they’ve been sitting a lot. If they’d been keeping up with those Treasury yields, rates would be even lower than they currently are. And that’s been applying especially noticeably over the last few days.
Those yields are one of the main indicators we use to make predictions about where rates will head. And, with that tool less reliable than usual, we sometimes struggle to get those predictions right. Until the relationship between rates and yields gets back in synch, you should bear that in mind.
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. 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
For a third week in a row, we’re seeing fewer economic reports published this week than most. We’re due an avalanche very soon.
Any report can create waves if it contains sufficiently shocking data. However, that hasn’t been the case this week. Even this morning’s better-than-expected economic data weren’t enough to cheer up markets spooked by talk of tariffs.
Markets tend to price in analysts’ consensus forecasts (below, we mostly 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: Markets closed for Memorial Day
- Tuesday: May Case-Shiller home price index (actual +3.7 percent) and Conference Board consumer confidence index (actual 134.2 points; forecast 132.0 points) also for May
- Wednesday: Nothing
- Thursday: Q1 GDP second revision of three (actual +3.1 percent; forecast +3.0 percent)
- Friday: April personal income (actual +0.5 percent; forecast +0.3 percent) and April consumer spending (actual +0.3 percent; forecast +0.2 percent). Plus April core inflation (actual +0.2 percent; forecast +0.2 percent) and second and the final reading of the May consumer sentiment index (actual 100.0 points; forecast 101.0 points)
When it comes to economic data, watch out for the last couple of days of this 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.