What’s driving mortgage rates today?
Average mortgage rates fell again yesterday, as we predicted. It wasn’t a big drop but it was the third in a row. True, they’re not yet back down to their September bests, which included a three-year low. But they’re heading the right way. And, of course, they’re exceptional bargains by almost any standard.
In a repeat of Tuesday, stock markets and Treasury rates plunged this morning following a poor report from the Institute of Supply Management. This one, which related to the US services sector, provoked more volatility than even the previous one did, which covered manufacturing.
So mortgage rates today look likely to fall — perhaps significantly. As always, events might overtake that forecast. But they’d have to be momentous ones.
|Conventional 30 yr Fixed||3.833||3.833||Unchanged|
|Conventional 15 yr Fixed||3.583||3.583||Unchanged|
|Conventional 5 yr ARM||4.313||4.298||Unchanged|
|30 year fixed FHA||3.292||4.276||Unchanged|
|15 year fixed FHA||3.333||4.282||-0.04%|
|5 year ARM FHA||3.333||4.563||-0.01%|
|30 year fixed VA||3.333||3.504||Unchanged|
|15 year fixed VA||3.333||3.643||-0.04%|
|5 year ARM VA||3.333||3.762||-0.02%|
|Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here.|
About the Daily Rate Update
Financial data affecting today’s mortgage rates
First thing this morning, markets looked set to deliver mortgage rates today that are lower. The Wall Street Journal summed up the current mood even before the ISM report: “From tariff-related tension to a German auto-emissions scandal and a Chinese credit squeeze, forces weighing on external economies have begun to wash back on the U.S.” And, soon after 10 a.m. (ET), the data, compared with this time yesterday, were:
- Major stock indexes were all sharply lower. (Good 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 climbed to $1,518 an ounce from $1,501. (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 down to $52 a barrel from $53. (Good for mortgage rates, because energy prices play a large role in creating inflation)
- The yield on 10-year Treasurys fell to 1.52% from 1.62%. (Good for mortgage rates.) More than any other market, mortgage rates tend to follow these particular Treasury bond yields
- CNNMoney’s Fear & Greed Index moved down to 30 from 36 out of a possible 100 points. (Good 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
Unless things change, today might be another good day for mortgage rates — possibly even an excellent one.
Verify your new rate (October 3, 2019)
Once again, it’s one of those weeks that builds to a Friday crescendo. Chances were, economic reports published on earlier days wouldn’t trouble markets much. That seemed likely up until Tuesday. It was then that very disappointing data from the Institute of Supply Management (ISM) on the manufacturing sector reminded us all that even reports that often go unnoticed can be disruptive if they’re bad enough.
This morning’s ISM report also shocked markets. It’s behind today’s sharp falls.
Of course, any day can carry risk. Because any news story that might 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: Nothing
- Tuesday: Two September manufacturing indexes: Markit’s purchasing manager index or PMI (actual 51.1 index points; no forecast) and the ISM index (actual 47.8%; forecast 50.2%). Plus August’s construction spending (actual +0.1%; forecast +0.4%)
- Wednesday: ADP employment for September (actual 135,000 new jobs; no forecast but 195,000 in August)
- Thursday: September nonmanufacturing index from the ISM (actual 52.6%; forecast 55.3%) and services index from Markit (actual 50.9 index points; no forecast but 50.7 in August). Plus factory orders (actual –0.1%; forecast -0.1%)
- Friday: September employment situation report, comprising nonfarm payrolls (forecast 146,000 new jobs); unemployment rate (forecast 3.7%) and average hourly earnings (forecast +0.2%). Plus August foreign trade deficit (forecast -$54.4 billion)
Tomorrow’s the big day. The other reports typically have to shock (as the ISM’s did on Tuesday and today) to have much impact.
Today’s drivers of change
US-China trade dispute
Recent sharp increases in mortgage rates have been largely down to renewed optimism over the US-China trade dispute. Indeed, over the last few months, that dispute has probably been the main driver of the changes in markets as they’ve moved in line with emerging and receding hopes of a resolution.
On Sept. 11, President Donald Trump announced that he was delaying the implementation of a new wave of tariffs on imports from China. He described the move as “a gesture of goodwill.” The delay was only for two weeks. However, it continues to cheer markets.
On Sept. 12, The Wall Street Journal said China’s negotiators were trying to narrow the focus of the next round of talks in the hope of finding an agreement. And on Sept. 13, The New York Times reported that China is exploring the resumption of large purchases of American soybeans and pork.
All that activity was in the wake of a Sept. 4 announcement of a resumption in the US-China trade talks. They’re scheduled to begin again in Washington DC this month. And markets are pinning their hopes on those to resolve what they perceive to be a damaging dispute.
Those announcements followed a new round of American tariffs on Chinese goods that became operative on Sept. 1. The Peterson Institute for International Economics reckons that brought the average US tariff on imports from that country to 21.2%, up from 3.1% when President 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. 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.
In August, China’s exports to the U.S. fell 16% to $44.4 billion, according to The New York Times. Its imports of U.S. goods fell 22% to $10.3 billion. Worse, the US recently slipped to third place from the top spot in the IMD World Competitiveness Center’s 2019 rankings.
Meanwhile, a World Trade Organization (WTO) report on Tuesday blamed the US-China dispute for a slowdown in global trade. It scaled back its latest forecast to growth of just 1.2%, compared with 2.6% in April.
Yesterday, the US trade representative’s office (USTRO) published a list of tariffs that the US plans to implement on goods from European Union (EU) countries. These total $7.5 billion and could start as early as Oct. 18. The EU is the world’s biggest trading bloc.
The move follows a WTO ruling on a long-running dispute over subsidies given to plane manufacturers Boeing and Airbus. But the EU responded in a tit-for-tat manner. EU commissioner for trade Cecilia Malmström issued a statement immediately after the USTRO announcement:
Our readiness to find a fair settlement remains unchanged. But if the US decides to impose WTO-authorised countermeasures, it will be pushing the EU into a situation where we will have no other option than to do the same.
However, there was rare good news on the trade front last week. The US and Japan concluded a deal that should see $7 billion of American products (mainly farm produce) soon gaining access to Japanese markets.
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 hopes and fears over trade.
Markets generally hate trade disputes because they introduce uncertainty, dampen trade, slow global growth and are disruptive to established supply chains. President 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 hard. And that fear, in turn, is likely to exert long-term downward pressure on mortgage rates, relieved only by hopeful news.
Last Wednesday, The New York Times suggested the current move in the House of Representatives to impeach the president may have only a limited effect on markets. It used the word “fleeting” to describe their probable impact. And, and least so far, its prediction seems to be holding up.
However, the Times went on to warn that the knock-on effects could become more sustained and damaging. That might arise if President Trump uses escalations in the trade war with China to distract voters.
Alternatively, the Times speculated, the effects might be benign if they mean he personally is distracted by the process and loses focus on trade.
Remember, those who want lower mortgage rates need bad news.
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 “security” (a tradable financial asset) 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 never welshes or redeems its bonds early (in spite of President Trump’s recent call to “refinance” government debt), 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. On Sept. 6, the administration published a 53-page proposal. But National Mortgage Professional magazine described that as “mostly a summary of potential strategies”
- 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 “financial data” 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 US 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 securities) 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 mid-August this year. Since then, they’ve 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.
What is Brexit?
Brexit is Britain’s exit from the European Union after 46 years of membership. New UK Prime Minister Boris Johnson still seems firm about his country ceasing to be an EU member state on October 31. Some expect him to defy (or find a workaround for) a new law passed by his parliamentary opponents that mandates him to request an extension to Jan. 31, 2020.
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.
On Sept. 11, the Johnson administration published — under protest, having been forced to do so by parliament — a government impact assessment of what a no-deal scenario might look like. It predicted public disorder, disruption at ports, rising prices, and shortages of some foods and medicines, as well as gas.
So why on earth would the UK put itself through this? After all, Brexit was sold partly on its potential economic benefits. The two sides (leave and remain) have become cultlike tribes who refuse to listen to each other and who view new information through the prism of their existing beliefs. Remind you of anywhere else?
Brexit in context
Britain’s currency has been yo-yoing as markets’ perceptions of the likelihood of a no-deal Brexit change. Every time markets see it as a real risk, the British pound sterling falls sharply. It rises when that risk is seen to recede.
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 EU powerhouse Germany shrank by 0.1% compared with the previous quarter. If the current one goes the same way, Germany will technically be in recession. And data published on Sept. 23 for German manufacturing suggest that’s a real possibility. Meanwhile, the UK’s economy is already in even worse shape. Its GDP fell by 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 (or should that be Jan. 31?) deadline.
Lower rates ahead?
On Sept. 6, CNBC ran a studio interview with Bob Michele, CIO of J.P. Morgan Asset Management. In that interview, Michele predicted that the yield on 10-year Treasurys would hit zero before the end of this year.
On the same day, Lawrence Yun, the National Association of Realtors® chief economist, said he could envisage a new record-low mortgage rate of 3.3% — also before the end of this year.
By all means, take cheer from these predictions. But never forget a remark made by the late Harvard economics professor John Kenneth Galbraith:
The only function of economic forecasting is to make astrology look respectable.
And the recent pattern of rises and falls suggests an uneven path, even if those prognosticators are ultimately proved right.
Negative mortgage rates
Just don’t expect zero or negative mortgage rates in America anytime soon. Still, they’re not unthinkable within a year or two. Writing for The Mortgage Reports, Peter Miller described a European 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 recently changed back our rate lock recommendation to reflect what appears to be a new mood in markets. So we now suggest that you lock if you’re less than 30 days from closing. Some professionals are recommending locking even further out from closing and we wouldn’t argue with them.
However, that doesn’t mean we expect you to lock on days when 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 future falls. But 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.
Bearing in mind professor Galbraith’s warning, I personally 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
But it’s entirely your decision.
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.