What’s driving current mortgage rates?
Average mortgage rates yesterday dipped a little further, as we predicted. It wasn’t a big drop but it was enough to take us yet closer to the ultra-low level we saw last Friday. That was the lowest since the fall of 2017. A couple more days like Wednesday and yesterday and we’ll be there.
Domestic economic data were mixed this morning but sufficiently close to expectations to avoid frightening investors. They were more worried about poor numbers out of China and disappointing results from a leading maker of semiconductors.
The data below the table are indicative of mortgage rates holding steady today or perhaps inching either side of the neutral line. However, as always, events could overtake that prediction.
|Conventional 30 yr Fixed||4||4||Unchanged|
|Conventional 15 yr Fixed||3.438||3.438||-0.06%|
|Conventional 5 yr ARM||3.875||4.507||Unchanged|
|30 year fixed FHA||3.438||4.423||Unchanged|
|15 year fixed FHA||3.375||4.324||Unchanged|
|5 year ARM FHA||3.375||4.942||Unchanged|
|30 year fixed VA||3.625||3.798||Unchanged|
|15 year fixed VA||3.563||3.874||Unchanged|
|5 year ARM VA||3.563||4.229||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 unchanged or nearly unchanged 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 were up at $1,354 from $1,340 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 inched back down to $52 from $53 a barrel (good for mortgage rates, because energy prices play a large role in creating inflation)
- The yield on 10-year Treasuries was down at 2.09 percent from 2.11 percent. (Good for borrowers because the rate’s falling this morning after a small rise yesterday). More than any other market, mortgage rates tend to follow these particular Treasury yields
- CNNMoney’s Fear & Greed Index edged up to 42 from 40 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
It might be a quiet day for mortgage rates.
Today’s drivers of change
Are markets bottoming out?
Since the middle of last November, a graph of average mortgage rates shows them falling with amazing consistency. Only occasionally and relatively briefly have they risen.
Some experts are now warning that they’re unlikely to go much lower — at least, absent something disastrous happening that pushes them beyond established ranges. Such bad news remains a possibility. Currently, there are tensions in the Middle East that could quickly turn into a shooting war involving the United States. Trade disputes might become more widespread and toxic, triggering a global recession. And, of course, events may quickly arise that are currently on nobody’s radar.
But, without such an external stimulus, those experts reckon rates are unlikely to fall much further. And, of course, there’s scope for good economic news that could see them rise, possibly sharply.
Meanwhile, the deals that are available for you to lock in are now excellent by all but the most extreme standards. That’s why we still suggest locking your rate if you’re less than 30 days from closing. In our assessment, the potential gains you stand to make are outweighed by the possible losses. But, as we say below on a daily basis, “Only you can decide on the level of risk with which you’re personally comfortable.”
Trade disputes and interest rates
Last Tuesday, Federal Reserve Chair Jerome H. Powell made a statement at a two-day Fed conference in Chicago. He referred to America’s trade disputes with China, Mexico (then relevant) and others and promised:
We do not know how or when these issues will be resolved. We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.
Investors took that as a sign that the Fed would cut rates later this year if the President’s policies prove troublesome for the economy. Some are already predicting the first such cut in July and a second later in the year.
The trade dispute with Mexico died over the weekend before the first tariffs were applied. However, the US-China trade dispute is very much alive. Indeed, President Trump increased tensions on Monday when he threatened to impose 25-percent tariffs on a further $300 billion of Chinese goods if that country’s government doesn’t cave by the end of this month.
Meanwhile, the possibility of a second front in the trade wars remains real. Last Saturday, British newspaper The Daily Telegraph was the latest of many to report fears of a possible US-European Union (EU) trade dispute. In a paper, research company Redburn had warned about the potential impact of tariffs on German car makers and had predicted a “nasty turn” in US-EU trade tensions.
How disputes hurt
Last week, we reported a Bloomberg article that suggested investors’ losses last month — mostly as a result of trade tensions — may have been close to $7 trillion. It went on to say, “This May was the second worst [for markets] since 1962.”
Markets hate trade disputes because they introduce uncertainty, dampen trade, slow global growth and are disruptive to established supply chains. The President is confident that analysis is wrong and that America will come out a winner. However, some fear a trade war — possibly on two 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.
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 occasionally they run ahead, dragging the owner along. And at 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. Why? Apparently, investors are concerned they’re not being rewarded sufficiently for the extra risk they shoulder when they buy mortgage-backed securities rather than Treasury bonds. And some are worried about the possibility of the government reforming Fannie Mae and Freddie Mac.
Those Treasury 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.
Short- and long-term differences
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.
Chad Morganlander, portfolio manager at Washington Crossing Advisors, last Tuesday provided CNBC’s Trading Nation with one possible scenario. Remember, mortgage rates often shadow yields on 10-year Treasuries:
In the short range, you could see a 10 to 15 basis point gap higher, but … inflation expectations we believe will be marked down and also global growth or aggregate demand we think will soften over the course of 2019 into 2020 … The yield on the 10-year could move up to 2.25% to 2.3% in the near term. Beyond that, it could fall back down to 2% and even to 1.75% in the next six to nine months …
In other words, we may see mortgage rates traveling higher in the short term before heading back down later in the year. But remember, that’s just one person’s (highly informed) opinion.
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. After all, current mortgage rates remain exceptionally low. 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 a reasonably important week for economic reports. However, as it turned out, there were few surprises so domestic data barely affected markets.
Markets tend to price in analysts’ consensus forecasts (below, we mostly use those reported by MarketWatch or Bain Mortgage) 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: May producer price index (actual +0.1 percent; forecast +0.1 percent)
- Wednesday: May consumer price index (CPI — actual +0.1 percent; forecast +0.1 percent) and core CPI (actual +0.1 percent; forecast +0.2 percent). Plus federal budget this afternoon
- Thursday: Nothing
- Friday: May retail sales (actual +0.5 percent; forecast +0.7 percent), industrial production (actual +0.4 percent; forecast -+0.2 percent) and capacity utilization (actual 78.1 percent; forecast 78.0 percent). Also June consumer sentiment index (actual 97.9 points; forecast 99.0 points)
Last week, all reports (except Friday’s unexpectedly bad employment situation one) were overshadowed by trade fears. We’ll have to see whether the same happens 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.