What’s driving current mortgage rates?
We predicted average mortgage rates would fall yesterday. And they did, but much further than we expected. They’re now back to being extremely close to their lowest level since the fall of 2017.
Yesterday’s drop was largely due to a monetary policy statement from the European Central Bank. This afternoon, a similar sort of statement is due from our own central bank, the Federal Reserve — see below for details. Markets may react to that (up or down; we won’t know until the announcement) even more sharply. But, if the Fed says what everyone’s expecting it to say, those markets may barely move.
Right now, the data below the table are indicative of mortgage rates rising today. However, everything might change with that Fed announcement this afternoon.
|Conventional 30 yr Fixed||3.938||3.938||Unchanged|
|Conventional 15 yr Fixed||3.438||3.438||Unchanged|
|Conventional 5 yr ARM||3.875||4.507||Unchanged|
|30 year fixed FHA||3.375||4.36||-0.06%|
|15 year fixed FHA||3.438||4.386||+0.06%|
|5 year ARM FHA||3.375||4.942||Unchanged|
|30 year fixed VA||3.5||3.672||Unchanged|
|15 year fixed VA||3.5||3.811||-0.13%|
|5 year ARM VA||3.5||4.207||+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 higher today. By approaching 10:00 a.m. (ET), the data, compared with this time yesterday, were:
- Major stock indexes were mixed and barely moving soon after opening (neutral 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 barely moved at $1,348 an ounce ($1,347 yesterday). (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 held steady at $53 a barrel (neutral for mortgage rates, because energy prices play a large role in creating inflation)
- The yield on 10-year Treasuries climbed to 2.09% from 2.07%. (Bad 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 inched up to 48 from 47 out of a possible 100. (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
It might be a worse day for mortgage rates.
Today’s drivers of change
Are markets bottoming out?
Since the middle of last November, the 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 by floating 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
The Federal Open Market Committee (FOMC) ends one of its regular two-day meetings this lunchtime. This is the Federal Reserve body that determines that organization’s interest rates — and thus many others. So investors study these meetings with an obsessive closeness.
Of course, the Fed doesn’t itself directly set rates for new mortgages. But the markets that fulfill that function are heavily influenced by it.
The Fed today
We think we know the general tenor the FOMC meeting will have taken. That’s because Fed Chair Jerome H. Powell recently made a statement. Referring to America’s trade disputes with China and others, he 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% 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 at the end of next month and a second later in the year.
But we’ll have a better idea of the Fed’s official stance at 2:30 p.m. (ET) this afternoon when Chair Powell hosts a press conference. Any attempt then to boost or reduce expectations of those cuts could significantly affect markets. Watch out, too, for the written report published 30 minutes earlier. That will include a “dot plot” that shows each individual governor’s expectations on interest rates.
The US-China trade dispute is very much alive. Indeed, President Trump increased tensions last 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. On Monday, the White House announced that the two presidents would meet at the G20 summit later this month, which cheered up investors.
Meanwhile, the possibility of a second front in the trade wars remains real. And there are increasing rumblings of a possible US-European Union (EU) trade dispute. The EU is the biggest trading bloc in the world and that would be a clash of Titans that could cause real harm to the global economy — as well as the economies of both participants.
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 see the current downward trend in mortgage rates continuing.
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. That policy may be confirmed or amended this afternoon. 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, which is what he’s talking about here:
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 and a great deal is assured. On the other hand, risk takers might prefer to bide their time and take a chance on further falls. 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
The big item on this week’s agenda is tomorrow’s press conference following a two-day meeting of the FOMC. See “Trade disputes and interest rates,” above, for more information. That press conference, which is scheduled for 2:30 p.m. (ET) on Wednesday, is the single event this week that’s most likely to impact mortgage rates.
Few other items on this week’s calendar are likely to move markets much. The scheduled economic reports are mostly second or third tier in importance. So they’d have to contain some shocking numbers to grab investors’ attention.
Markets tend to price in analysts’ consensus forecasts (below, we mostly use those reported by MarketWatch, Moody’s Analytics 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 housing starts (annualized actual 1.27 million new homes; forecast 1.23 million). Also, FOMC meeting starts today
- Wednesday: FOMC meeting ends with important report, published at 2:00 p.m. (ET), and a press conference 30 minutes later
- Thursday: Leading indicators (forecast +0.1%)
- Friday: Two purchasing managers index (PMI) flashes* for June: manufacturing PMI (forecast TBA points) and services PMI (forecast TBA points). Also existing home sales in May (annualized forecast 5.28 million homes)
* A “flash” is an initial reading that’s subject to change later.
Recently, almost all reports have been 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% 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%).
- 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% 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%. 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 7%. 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.