Forecast plus what’s driving mortgage rates today
Average mortgage rates fell appreciably yesterday, as we predicted. They’re now at lows last seen in 2016.
All this was down to fears over the possible economic impact of the Wuhan coronavirus (more below). And those concerns remain real. But markets seem to be drawing breath today in ways that may be neutral or unfriendly to mortgage rates.
And, so far this morning, mortgage rates today look likely to rise modestly or maybe hold steady. But, as always, events may overtake that prediction.
|Conventional 30 yr Fixed||3.708||3.708||+0.08%|
|Conventional 15 yr Fixed||3.667||3.667||+0.25%|
|Conventional 5 yr ARM||3.875||4.039||+0.02%|
|30 year fixed FHA||3.5||4.486||+0.29%|
|15 year fixed FHA||3.125||4.072||-0.04%|
|5 year ARM FHA||3.25||4.419||-0.03%|
|30 year fixed VA||3.208||3.389||+0.13%|
|15 year fixed VA||3.208||3.538||+0.25%|
|5 year ARM VA||3.458||3.702||+0.08%|
|Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here.|
Market data affecting today’s mortgage rates
First thing this morning, markets looked set to deliver mortgage rates today that are a little higher or unchanged. By approaching 10 a.m. (ET), the data, compared with roughly the same time yesterday morning, were:
- Major stock indexes were all higher. (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 when indexes are lower
- Gold prices edged down to $1,576 an ounce from $1,578. (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 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 Treasurys edged up to 1.63% from 1.61%. (Bad for mortgage rates.) More than any other market, mortgage rates tend to follow these particular Treasury bond yields
- CNN Business Fear & Greed index nudged up to 49 from 48 out of a possible 100 points. A month ago, it was up at 91. (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
Note that many of those numbers represent very small changes. So today might be only a slightly worse or quiet day for mortgage rates.
The Wuhan coronavirus may well significantly affect markets again this week. It was certainly a dominant factor last week. But, this morning, markets seem to be drawing breath, and perhaps correcting for an overreaction yesterday. Of course, bad news about the outbreak emerging during the day could change all that.
The good news is that last Thursday the World Health Organization decided it was “too early” to declare the outbreak a “Public Health Emergency of International Concern (PHEIC),” though that could change at any moment. And doctors are reassuring: the vast majority of those who become infected recover fully.
Nevertheless, this outbreak will inevitably draw comparisons with the severe acute respiratory syndrome (SARS) one in 2003 and the Middle East respiratory syndrome (MERS) one in 2012. Both those were coronaviruses, too. The less famous MERS actually killed more people (about 875) than SARS (750). But MERS infected only about 2,500, while SARS was more infectious and affected about 8,000.
Overnight figures show the Wuhan strain had been confirmed to have infected about 4,515 (up from 2,800 yesterday) and killed 106 (up from yesterday’s 81). That’s a much lower death rate (less than 3%) among those infected than either SARS (nearly 10%) or MERS (35%) had. But, of course, we don’t yet know how many of those who are currently patients might eventually die from the condition, nor how quickly the number of infected people might grow. So be cautious about such figures.
Over the weekend, a public health team at Imperial College (London University) said its “best guess” was that 100,000 people worldwide had already contracted the virus, most without yet knowing it. The team believed the likely range was anywhere between 30,000 and 200,000. And it thought that each of those would pass it on to two or three other people, on average. If any of those numbers turns out to be true, then this outbreak would be way more widespread than either SARS or MERS.
Wuhan coronavirus: the threat
But there’s so far too little epidemiological data to properly model how the outbreak might spread and how many deaths it might cause. And, absent that, it’s easy for journalists, investors and the rest of us to overestimate (or just possibly underestimate) the threat, admittedly based on some grim numbers and facts.
As a species, humans are terrible at risk assessment. And markets are made up of humans. So their reaction to the SARS outbreak was sharp, even though it ended up resulting in relatively few deaths — tragic though each of those was for family and friends. It’s too early to say whether history will repeat itself.
But, leaving aside the health and human effects, it would be wrong to underestimate the economic impact such epidemics have. Senior market analyst at Oanda Edward Moya reckons the current travel ban alone could create a 1 percentage point hit on China’s gross domestic product growth this quarter.
And you can already see one economic effect this virus outbreak is having. Oil prices have plummeted since the news broke. That’s partly because the number of air passengers has dropped. During an epidemic, scared people try to avoid flying.
But it’s not just the oil, airline and travel sectors that are being hit. Already, others are reporting slowdowns.
The silvery lining to a very dark cloud? All this has proved positive for those who want lower mortgage rates.
Economic reports this week
Last week was unusually quiet. But we’re in line for some much more important reports in the next few days. What isn’t yet clear is whether those will cut through the shadow of the virus crisis, which seems to be investors’ main concern.
But, typically, any economic report can move markets, providing it contains news that’s shockingly good or devastatingly bad — providing that news is unexpected.
That’s because markets tend to price in analysts’ consensus forecasts (below, we 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.
And 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
MarketWatch has resumed its publication of forecasts. And this week’s calendar for economic reports comprises:
- Monday: December new home sales (actual 694,000 new homes, annualized; forecast 735,000)
- Tuesday: January consumer confidence index (actual 131.6 index points; forecast 128.8). Plus December durable goods orders (actual +2.4%; forecast -0.3%) and November’s Case-Shiller home prices (actual +3.5%; no forecast but +3.3% in October)
- Wednesday: Federal Reserve announcement, press conference and report (see below)
- Thursday: gross domestic product (GDP) for the fourth quarter of 2019 (forecast +2.0%)
- Friday: December personal income (forecast +0.3%), consumer spending (forecast +0.3%) and core price index (forecast +0.2%). Plus January’s consumer sentiment index (forecast 99.1 index points)
There are some big ones in there. Assuming they’re not too distracted by the coronavirus, markets might easily be moved by unexpected outcomes for GDP, personal income, consumer spending, and consumer confidence and sentiment.
Fed and earnings this week
Wednesday’s Federal Reserve announcement and press conference is often a trigger for market movements. But its current policy over interest rates is well-known and looks set. So events that day are likely to have an impact only if they bring the announcement of a change of policy. However, its report will contain data that investors and analysts find interesting. So don’t write it off completely.
And, finally, we’re still in the earnings season. That’s when big companies publish their figures for the previous quarter. And this week sees reports from, among others, Apple, Boeing, eBay, Lockheed Martin, MasterCard, Microsoft, PayPal Pfizer, and Visa.
Today’s drivers of change
What 2020 might hold
The year 2019 ended with most stock indexes at exceptional or record highs. And investors had one of the best 12 months in living memory. So will 2020 bring more of the same? It has so far.
But few think that will continue for long. Still, most economists, analysts and observers seem to believe we’re looking at an OK year.
Certainly, fewer are expecting a US recession during 2020 than was the case a few months ago. When Reuters polled 100 economists in January, about 20-25% thought one was coming this year and around 30-35% expected one within the next two years.
That survey also saw a consensus among the economists polled over the expectation that the US economy would “coast” this year, “with annualized growth expected to have barely moved from the latest reported rate of 2.1%” through to the second quarter of 2021.
The Federal Reserve’s role
And several financial reviews of 2019 warned that market rises have largely been fueled by the Federal Reserve’s actions rather than underlying economic strength. But the Fed’s supply of metaphorical gas to maintain such momentum is running low — as is its willingness to use what’s left.
So market growth this year may be way more modest than in 2019, though many reckon it will remain positive. On Jan. 6, The Financial Times carried an analysis under the headline, “Fed looks forward to ‘boring’ 2020 after frenetic year.”
Don’t take forecasts too seriously
Just don’t take such forecasts too seriously. And 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.
Real-world forecasts also gloomy
On Jan. 20, global accountancy firm PwC unveiled its 23rd annual survey, which this year polled almost 1,600 chief executive officers (CEOs) from 83 countries. A whopping 53% of respondents predicted a decline in global GDP growth in 2020. That was up from 29% in 2019 and 5% in 2018.
Who was most pessimistic? Those from North America, where 63% of CEOs expected lower global growth. And only 36% of American CEOs were positive about their own companies’ prospects for the year ahead. Again, that was many fewer than in 2019. Chair of the PwC network Bob Moritz issued a statement:
Given the lingering uncertainty over trade tensions, geopolitical issues and the lack of agreement on how to deal with climate change, the drop in confidence in economic growth is not surprising — even if the scale of the change in mood is. These challenges facing the global economy are not new — however the scale of them and the speed at which some of them are escalating is new.
Lower mortgage rates ahead?
It’s not hard to find experts who predict that mortgage rates could plumb new depths in 2020. And they may be proved right.
Those issues highlighted in the PwC survey are real. A recession still might arise. The phase-two US-China trade talks could collapse and the whole dispute escalate. The Wuhan coronavirus could mutate and turn into a devastating pandemic. Or some undreamed-of crisis could come out of nowhere. Any of those could send those rates plummeting. But they’re all highly speculative.
And don’t forget John Kenneth Galbraith’s observation.
Rate forecasts for 2020
It may be a mistake to rely on experts’ forecasts. But there’s nothing wrong with taking them into account, appropriately seasoned with a pinch of salt. After all, who else are we going to ask when making plans?
Fannie Mae, Freddie Mac and the Mortgage Bankers Association (MBA) each has a team of economists dedicated to monitoring and forecasting what will happen to the economy, the housing sector and mortgage rates. And here are their latest forecasts for the average rate for a 30-year, fixed-rate mortgage during each quarter (Q1, Q2 …) in 2020. All were published in January 2020, except Freddie’s, which usually appears near the end of each month:
Freddie Mac reckons that particular mortgage rate averaged 3.9% during 2019. So, if the experts’ forecasts turn out to be right, it could be another good year for new mortgage borrowers — and for existing ones who want to refinance.
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.
Already, Denmark’s Jyske Bank is offering its local customers a mortgage with a nominal interest rate of -0.5%. Yes, that’s minus 0.5%. However, after fees, that’s likely to be closer to a free or incredibly cheap mortgage than one that actually pays borrowers.
But don’t think there isn’t a wider price to pay for ultralow mortgage rates. On Dec. 18, The New York Times reported that, in much of Europe, these are “driving a property boom that is pricing many residents out of big cities and causing concern among policymakers.” And many fear a bubble that could end badly.
For now, trade may be on the back burner for markets. That’s because, on January 15, President Donald Trump took a “momentous step” when he signed the much-heralded, 86-page, phase-one trade agreement with China’s Vice-Premier Liu He at the White House. “It just doesn’t get any better than this,” the president remarked.
The wide-ranging deal covers some important areas, including commitments from China to:
- Buy $200 billion-worth of specific US products over the following two years
- Better protect American companies’ intellectual property
- Stop the transfer of technologies from the US
- Cease manipulating its currency
So why did markets respond in such muted ways to the signing? And why should you still see trade disputes as a continuing factor in future mortgage rates?
Critics’ views of the phase-one trade deal
Well, some perceive the deal as weak in key areas:
- No independent dispute resolution — If the US believes China is reneging, it can only engage in further talks and introduce new tariffs
- Some doubt China’s ability to make good on its $200 billion purchasing commitment
- The intellectual property sections contain little that’s new — They mostly restate existing agreements
- There is no provision for reining in China’s system of government subsidies for industries
- It fails to address concerns about cybersecurity and the Chinese hacking of American companies’ IT infrastructures
The White House would argue that those alleged weaknesses will be addressed in a phase-two deal. But most think that’s unlikely to materialize until after this year’s presidential election.
Limited economic boost
Following its January poll of economists, Reuters chose to quote Janwillem Acket, who’s chief economist at Julius Baer, as representative of wider opinions:
The recent Phase 1 deal between the U.S. and China suggests decreasing odds of an escalation to a full-blown trade war. However, the deal so far is not comprehensive enough to significantly boost economic momentum.
However, perhaps the new deal’s biggest drawback is that it leaves so many tariffs still in place. According to an analysis, published on the day of the signing, by the Peterson Institute for International Economics:
Even with the phase one deal in effect, Trump will have increased the average US tariff on imports from China to 19.3% from 3.0% in January 2018. The deal means the average US tariff will be reduced only slightly from its current level of 21.0%.
And this dispute has been causing some pain to both sides. China’s slipped to third place from first in the Census Bureau’s list of America’s trading partners. And its economy is certainly under strain. Indeed, on Jan. 17, China reported its slowest annual GDP growth in 29 years — though that was still +6.1% in 2019.
But the dispute’s impact here has also been painful for many.
Higher prices for American families
A September study by the nonpartisan National Foundation for American Policy estimated, “the tariffs will cost the average household $2,031 per year, and will be recurring so long as the tariffs stay in effect.”
Now, the White House would undoubtedly challenge that figure, as do some more independent analyses. Some believe that American businesses are bearing much of the cost and are yet to pass that on to consumers. And prices may rise significantly only when stocks of goods that arrived before tariffs were introduced are exhausted. Many importers increased their orders earlier last year to get in ahead of tariff implementation dates.
But, on Dec. 2, New York Federal Reserve Bank researchers published a report that showed that American businesses and consumers were indeed bearing the brunt of the tariffs. They found Chinese import prices fell by only 2% between June 2018 and September 2019. And that means Americans were picking up the rest of the tab on tariffs as high as 25%. It’s how the pain is distributed that’s disputed.
Of course, both those studies were conducted before the new phase-one deal was announced. Now that’s signed, you can shave perhaps 11% off additional tariff costs, according to calculations by Yahoo! Finance.
European Union next?
The president occasionally makes bellicose remarks about what he perceives to be an unfair trade imbalance between the US and the European Union. The EU is the world’s biggest trading bloc. Together, its member states form a larger economy than China or even America.
The administration has already in 2019 imposed tariffs on nearly $10 billion worth of imports from the EU, including $2.4 billion on French luxury goods in December. However, a couple of glimmers of light emerged during the World Economic Forum in Davos (Jan 21-24), which was attended by the president and other world leaders.
Last Tuesday, French officials were suggesting that a temporary trade truce had been agreed to allow for further talks. And, last Wednesday, hopes for a new US-EU trade agreement grew. And, that week, The Financial Times ran a headline, “Trump and EU promise to press on to reach trade deal.”
How trade disputes hurt
All this has been fueling uncertainty in markets. And that, in turn, created 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.
On Dec. 18, in a vote almost wholly along party lines, the House of Representatives passed two articles of impeachment against President Trump. One is for abuse of power and the other for obstruction of Congress.
And, on Jan 21, the Senate began a trial based on those articles. You may think it unlikely that the current Republican-dominated Senate will convict the president.
On Sept. 25, The New York Times suggested moves in the House to impeach the president may have only a limited effect on markets. It used the word “fleeting” to describe the probable impact.
Later, on Dec. 19, the Times reiterated that view:
… the stock market has been largely unfazed by the news of impeachment proceedings, and that is unlikely to change …
And, at least so far, the Times’s predictions seem to be holding up, in spite of some continuing dramatic scenes on Capitol Hill.
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 Jan. 3, those yields fell nearly 9 basis points (a basis point is one-hundredth of one percentage point). But average mortgage rates inched down by only 1 basis point.
Indeed, divergences have become routine.
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 US Treasury never welshes or redeems its bonds early, making those ultrasafe and predictable. Meanwhile, mortgage borrowers often refinance and occasionally default
- Some are worried about government reform of Fannie Mae and Freddie Mac. On Oct. 28, National Mortgage Professional magazine suggested, ” … we have now seen the implementation of the first steps, some of which have only increased market volatility.”
- 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 “market 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.
Rate lock recommendation
We suggest that you lock if you’re less than 30 days from closing. True, mortgage rates have been moving within unusually tight ranges in recent months. So the risk of floating for longer may be limited. But the prospect of worthwhile gains seems similarly restricted, assuming an absence of earth-shattering news.
Of course, we’re keeping our eye on the Wuhan coronavirus. And we may change our rate lock recommendation to 45 days or longer, if that turns out to be as disastrous as some seem to think.
Inevitably, markets are likely to move more sharply and decisively sometime soon. But we still can’t be sure what might trigger that. And so the direction in which they’ll take off is equally unknown.
However, none of this means we expect you to lock on days when mortgage rates are actively falling. That advice is intended for more normal times.
Only you can decide
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.