What’s driving mortgage rates today?
Average mortgage rates fell yet again yesterday. It’s been an extraordinary 10 business days since the last rise. Mortgage News Daily traces recent unexpected falls to the end of 2018 when it says rates were “too high.” And it suggests those falls — which have run counter to other markets that those rates usually shadow — may simply be reality belatedly catching up. Maybe.
Will today be the day on which mortgage rates finally fall back into line with other markets? If so, they may rise. Markets are more cheerful this morning following yesterday’s announcement of a resumption next month of the US-China trade talks. Good employment numbers from ADP fueled optimism. And markets were all looking bad for those rates.
So, if they do fall back in line, mortgage rates today look likely to move higher. But that depends on whether rates are done “catching up.” And, as always, events might anyway overtake that prediction.
|Conventional 30 yr Fixed||3.875||3.875||Unchanged|
|Conventional 15 yr Fixed||3.5||3.5||Unchanged|
|Conventional 5 yr ARM||4.438||4.282||+0.02%|
|30 year fixed FHA||3.063||4.045||-0.13%|
|15 year fixed FHA||3.25||4.198||Unchanged|
|5 year ARM FHA||3.438||4.598||-0.03%|
|30 year fixed VA||3.125||3.293||-0.06%|
|15 year fixed VA||3.188||3.496||Unchanged|
|5 year ARM VA||3.375||3.77||-0.03%|
|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 today that are higher. By approaching 10 a.m. (ET), the data, compared with this time yesterday, were:
- Major stock indexes were all significantly higher soon after opening. (Bad for mortgage rates.) When investors are buying shares they’re often selling bonds, which pushes prices of Treasurys 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 $1,536 an ounce from $1,555. (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 climbed to $57 a barrel from $56. (Bad for mortgage rates, because energy prices play a large role in creating inflation)
- The yield on 10-year Treasurys jumped to 1.58% from 1.49%. (Bad for mortgage rates.) More than any other market, mortgage rates tend to follow these particular Treasury bond yields
- CNNMoney’s Fear & Greed Index rocketed to 41 from 30 out of a possible 100 points. (Bad for mortgage rates.) “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
So it might be a worse day for mortgage rates. Yes, we said the same yesterday and were proved wrong. But, so far, today’s movements have been much sharper and more decisive.
Verify your new rate (September 5, 2019)
Today’s drivers of change
US-China trade dispute
Yesterday saw the announcement of a resumption in the US-China trade talks. They’re scheduled to begin again in Washington DC in October. And markets are pinning their hopes on those to resolve what they perceive as a damaging dispute.
That announcement followed a new round of American tariffs on Chinese goods that became operative on Sunday, Sept. 1. The Peterson Institute for International Economics reckons that brings the average US tariff on imports from that country to 21.2%, up from 3.1% when President Donald Trump was inaugurated.
This is causing some pain to both sides. China’s slipped to third place from first in the list of America’s trading partners. And on Monday it lodged a new complaint with the World Trade Organization. Meanwhile, researchers from University College London and the London School of Economics calculate the average American family will pay about $460 a year in higher prices as a result of the trade war’s tariffs.
At the same time, the possibility of a second front in the trade wars remains real. And there are general rumblings of possible escalations in the US-European Union (EU) trade dispute. Recently, the US proposed more tariffs on EU goods, though those are yet to be implemented.
How trade disputes hurt
All this has been fueling uncertainty in markets. And that, in turn, is creating volatility. Many of the recent wild swings in mortgage rates, bond yields, stock markets, and gold and oil prices have been down to fears (and occasionally hopes) over this trade dispute.
Markets hate trade disputes because they introduce uncertainty, dampen trade, slow global growth and are disruptive to established supply chains. President Donald Trump 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 long-term 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 — or, at least, plateauing.
Markets are fairly confident that the Federal Reserve will deliver a further rate cut on Sept. 18 following the next meeting of the Federal Open Market Committee (FOMC). That’s the Fed body that sets the organization’s own interest rates — and therefore many others.
However, the minutes of the last meeting of the FOMC revealed that its members were much more divided than many had previously assumed. “A couple” wanted a bigger cut. But “several” wanted no change at all.
On Aug. 22, Philadelphia Fed President Patrick Harker and Kansas City Fed President Esther George both said publicly that they wouldn’t support further cuts. And yesterday morning’s Wall Street Journal quoted Boston Fed President Eric Rosengren saying the “relatively strong” US economy requires no further cuts.
Fed and future rates
In spite of this, most observers, analysts and investors are expecting a further cut later this month. Indeed, some are predicting a half-percentage-point rate cut then, rather than the usual quarter-point change.
And there’s been a widespread expectation that a September cut will be the first in a series, with as many as three between now and the end of the year. But the level of resistance among FOMC members at July’s meeting may now put that level of slashing in doubt.
To be clear, the Fed does not directly determine mortgage rates — except those for existing adjustable-rate loans. However, it does greatly influence the market that does.
Treasurys and mortgage rates
Why are mortgage rates currently so often out of sync with the markets they usually shadow? After all, markets are generally interdependent.
During economically worrying times (the opposite happens when confidence is high), investors sell stocks because they fear a downturn. But they have to put their money somewhere. So they buy lower-yield but safer “risk-off” investments, such as US Treasurys, gold and mortgage-backed securities (MBSs).
MBSs are bundles of individual mortgages, wrapped up within a bond-like product and sold on a secondary market. And, the more investors want to buy them, the lower the mortgage rate you’re likely to be offered.
Markets in sync
Usually, the flows of money are fairly even across risk-off markets. So you can typically assume that gold and bond prices will go up or down roughly in line both with each other and inversely with falling or rising stock prices.
And the same applied to MBSs. In fact, the relationship between 10-year Treasury yields and mortgage rates was for years so close that many (wrongly) assumed the two were formally linked.
Why the change?
But nobody could make that mistake now. For example, on Aug. 23, those yields plunged from 1.60% to 1.54% but mortgage rates only edged down.
So why are the MBSs that actually determine mortgage rates drifting apart from risk-off investments generally and those Treasury yields in particular? There are three main reasons:
- Investors are concerned they’re not being rewarded sufficiently for the extra risk they shoulder when they buy MBSs rather than Treasury bonds. In particular, the Treasury doesn’t welsh or redeem its bonds early, making those ultrasafe and predictable. Meanwhile, mortgage borrowers often refinance and occasionally default
- Some are worried about the possibility of the government reforming Fannie Mae and Freddie Mac
- The things that spook or please investors in Treasury bonds don’t always apply to mortgage-backed securities
And another factor affects mortgage rates rather than MBSs themselves. Mortgage lenders are distrustful of extreme volatility and often take a wait-and-see stance before adjusting the rates they offer
Those Treasury yields are one of the main indicators (see the list above for others) we use to make predictions about where rates will head. And, with those tools more unreliable than usual, we sometimes struggle to get our daily predictions right. Until the relationship between rates, yields and other indicators gets back in sync, you should bear that in mind.
“Inverted yield curve” is easy to understand
You’ve probably read a lot recently about the “inverted yield curve.” But it’s the sort of impenetrable jargon that most of us skip over on the grounds life’s already too short.
But hold on! It’s actually easy to understand. It simply means that short-term Treasury bills, notes and bonds are giving higher yields than long-term ones. Yes, that’s rare. You usually expect to get a better return the longer you commit to an investment.
It’s also a little scary. Frequently, in the past, when the yield curve has inverted, a recession has soon followed. That doesn’t mean it will this time. But it’s a bit worrying.
Critical yield curve inverted
Any time yields are lower on longer-term bonds than shorter ones, that’s an inversion. But it’s when the 2- and 10-year Treasury yields (the return you get on US government bonds) invert that has proved to be the most reliable (close to infallible) predictor of recessions.
And those two hadn’t crossed the line since June 2007 — until the last few weeks. Since then, it’s crossed and recrossed it several times.
Unless you’re in hiding, you can’t have missed the resulting doom-laden media reports, full of dire predictions. In fact, right now, there are few other noticeable signs of a recession looming. And some say fears are overblown.
Our Brexit primer
Brexit is Britain’s exit from the European Union. New UK Prime Minister Boris Johnson currently seems firm about his country ceasing to be an EU member state on October 31.
Johnson insists that Brexit will happen regardless of whether a withdrawal agreement containing transitional arrangements is in place. But such a “no-deal Brexit” is widely seen as a profound act of economic self-harm that could affect the wider European and global economies.
Brexit’s political dramas
Last week, Johnson even announced plans to “prorogue” (suspend) parliament, so that, according to his critics, legislators cannot frustrate his executive’s will. However, this week, he’s suffered multiple defeats in parliament. And a bill is currently working through the legislature that would outlaw a no-deal Brexit. A general election within weeks now looks highly likely.
The prime minister’s week got even worse earlier today when his brother, Jo (yes, a man, in spite of the spelling) Johnson, announced he’d be standing down both as a member of the cabinet and a member of parliament. Jo Johnson wrote in a politically devastating tweet:
In recent weeks I’ve been torn between family loyalty and the national interest — it’s an unresolvable tension & time for others to take on my roles as MP & Minister.
Brexit in context
Britain’s currency has been yo-yoing as markets’ perceptions of the likelihood of a no-deal Brexit change. This morning, the British pound sterling jumped to a five-week high as that prospect receded.
However, worse for the rest of the world, all this could be happening when many European economies are in trouble. For example, during the last quarter, gross domestic product (GDP) in Germany fell by 0.1% compared with the previous quarter. If the current one goes the same way, Germany will technically be in recession. And the UK’s economy is already in an even worse state. Its GDP fell 0.2% that quarter.
The last time Brexit was perceived to be a real threat to the global economy, it had a direct effect on American mortgage rates, pulling them down. That may well happen again this time around — though probably not noticeably until closer to that Halloween deadline.
Negative mortgage rates
Don’t expect negative mortgage rates in America anytime soon. But they’re not unthinkable within a year or two. Writing for The Mortgage Reports, Peter Miller described a Danish bank that is already charging its customers a negative mortgage rate:
A Danish bank called Jyske Bank is offering a mortgage that pays the borrower.
“Jyske Realkredit is ready with a fixed-rate mortgage with a nominal interest rate of minus 0.5%,” says the bank.
“Yes, you read right,” it continues. “You can now get a fixed-rate mortgage with a maturity of up to 10 years, where the nominal interest rate is negative.” (Of course, the bank warns, there will be fees, so you may not actually get a return.)
Read the full report: Negative mortgage rates are real — and they might come to the U.S.
Rate lock recommendation
We changed our rate lock recommendation recently to reflect changes in markets. So we now suggest that you lock if you’re less than 15 days from closing.
However, that doesn’t mean we expect you to lock while mortgage rates are actively falling fast. That advice is intended for more normal times.
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
- FLOAT if closing in 30 days
- FLOAT if closing in 45 days
- FLOAT if closing in 60 days
This week’s calendar of economic reports had two key days: Tuesday and Friday. Tuesday’s data were disappointing and likely added to downward pressure on mortgage rates.
Tomorrow sees the release of August’s official employment situation report. And that’s one of the Top-3 reports (along with GDP and inflation) that markets watch most closely. Strap in for that one — although expect fireworks only if it contains surprises.
Of course, any day can carry risk. Because any news story that can affect the American or global economies has the potential to move markets — and mortgage rates. And any economic report can trigger similar changes if it contains sufficiently shocking information.
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.
This week’s calendar
- Monday: Labor Day — no reports
- Tuesday: August ISM* manufacturing index (actual 49.1%; forecast 51.5%). Also July construction spending (actual +0.1%; forecast +0.6%)
- Wednesday: July foreign trade deficit (actual $54.0 billion; forecast $53.4 billion)
- Thursday: August ISM* nonmanufacturing index (actual 56.4%; forecast 54.2%) and ADP employment (actual 195,000 new jobs; previous month142,000)
- Friday: August employment situation report, including nonfarm payrolls (forecast +170,000 new jobs), unemployment rate (forecast 3.7%) and average hourly earnings (forecast +0.3%)
*ISM is Institute for Supply Management
This is another week that builds to a Friday climax.
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.