Forecast plus what’s driving mortgage rates today
Average mortgage rates actually edged higher on Friday, defying trends in other markets and confounding our prediction. Read about the probable causes below. It’s not time to panic yet: Average rates last Friday evening were appreciably lower than those the previous one. But anyone who’s the slightest bit risk-averse must surely be thinking hard about locking soon.
First thing this morning, markets were again in virus-related uproar. This time, the trigger was Saudi Arabia, which is reacting to the failure of oil cartel OPEC to reach a price-setting deal. It’s raising production and cutting already falling prices, causing mayhem in most markets. Things were so bad on Wall Street that an automated trading brake was triggered when the S&P plunged 7% in five minutes.
|Conventional 30 yr Fixed||3.25||3.25||Unchanged|
|Conventional 15 yr Fixed||3.375||3.375||Unchanged|
|Conventional 5 yr ARM||3.5||3.5||+0.04%|
|30 year fixed FHA||3.5||4.487||-0.06%|
|15 year fixed FHA||3.25||4.197||Unchanged|
|5 year ARM FHA||3||3.814||+0.05%|
|30 year fixed VA||2.938||3.115||Unchanged|
|15 year fixed VA||2.875||3.201||-0.06%|
|5 year ARM VA||3.313||3.112||Unchanged|
|Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here.|
Normally, we could confidently predict that such markets would result in sharply lower mortgage rates today. But things have changed (see below). And we may well see those rates holding steady or even edging higher. However, as always, events may overtake that prediction.
Market data affecting today’s mortgage rates
First thing this morning, markets looked set to deliver mortgage rates today that are lower. But pressures on lenders may see them actually unchanged or even higher. Soon after 10 a.m. (ET), the data, compared with roughly the same time on Friday morning, were:
- Major stock indexes were all tumbling precipitously. (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 when indexes are lower
- Gold prices fell to $1,666 an ounce from $1,685. (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 fell to $34.04 a barrel from $43.36 (Good for mortgage rates* because energy prices play a large role in creating inflation and also point to future economic activity.)
- The yield on 10-year Treasurys fell to 0.54% from 0.70%. A year ago, it was at 2.63%. (Good for mortgage rates.) More than any other market, mortgage rates tend to follow these particular Treasury bond yields
- CNN Business Fear & Greed index fell to 3 from 6 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
*A change of a dollar on gold prices or a cent on oil ones is a tiny fraction of 1%. So we only count meaningful differences as good or bad for mortgage rates.
Read the next few paragraphs to discover why these market conditions may mean mortgage rates today act differently from how you’d normally expect.
Why mortgage rates are untethered from other markets
We’re usually quietly proud of our record for predicting the day’s changes in average mortgage rates. But recently, our forecasts have been less accurate. Why’s that?
Well, we can only base our predictions on what’s happening in other markets with which mortgage rates traditionally have more or less close relationships. But those relationships have been drifting apart recently.
That’s not wholly surprising amid the sort of volatility we’ve been seeing recently. But it’s more than that. Last Friday was only one example of key markets acting in mortgage-rate-friendly ways — yet those rates still rising. So what’s going on?
Lenders managing supply and demand
The Mortgage Bankers Association reckons refinance applications during the last week of February were more than twice as numerous than (up 224% on) the same week a year earlier. And that sort of growth has been going on for a while now.
So some lenders simply lack the human resources to process all the applications they’re receiving. And even those with all-online offers and scalable IT infrastructures that can get them over that administrative hurdle face another problem.
The standard mortgage lending model sees loans bundled up into bond-like financial instruments (mortgage-backed securities) and sold on a secondary market soon after closing. But lenders need to have cash reserves to get them past closings. And those finite reserves are stretched by sudden and unexpectedly high demand, while adding to them takes time. So those lenders have to manage demand for their products (mortgages) in order to match supply (money for closings).
And you don’t need to have attended even Economics 101 to know that the fastest way to manage excessive demand for a product is to raise (or at least moderate) its price.
Virus still the biggest factor for mortgage rates
The Wuhan coronavirus (Covid-19, standing for Coronavirus disease 2019) was certainly behind the chaos seen in global markets since Feb. 20. The virus now has a confirmed presence on five continents and in 110 countries, up from 95 on Friday. Here at home, the US has 566 cases, up from 233 on Friday.
China, South Korea, Japan (including the Diamond Princess cruise ship harbored in Yokohama, Japan), Italy, Iran, France, Germany and Spain each has infections in the thousands or tens of thousands. And 13 other countries have them in the hundreds. China, Japan, Italy, France and Germany rank among the world’s top-10 economies, while South Korea occupies the No. 11 slot and Spain the No. 13.
While markets are made up of people who share the fear and empathy of the rest of humanity, their focus isn’t directly on Covid-19’s health implications. Their concern is the virus’s economic consequences, which are a byproduct of the medical ones.
Data suggest those economic consequences are likely to turn out to be severe. Over the weekend, the Italian government announced that it was implementing a strict quarantine on 16 million residents, representing a quarter of the country’s population. The economic implications for the regions affected boggle the mind.
Meanwhile, last Friday, a poll by Reuters of economists based in China found:
The coronavirus likely halved China’s economic growth in the current quarter compared with the previous three months, more severe than thought just three weeks ago and triggering expectations for earlier interest rate cuts.
And, already, several other governments and central banks are forecasting reduced gross domestic product (GDP) growth for their economies. Indeed, last Monday, the Organization for Economic Cooperation and Development (OECD) slashed its 2020 global growth forecasts to 1.5%, almost half the 2.9% it was expecting before Covid-19 took hold. It also warned that the virus could “plunge several countries into recession this year,” according to The Guardian.
The dangers of global connectedness
Globalization has brought much more sophisticated and diverse supply chains. So, for instance, if you want to build a car in America, you’ll likely rely on parts from several other nations. And that means you’ll be vulnerable to any disruption in those other countries.
As long ago as Feb. 4, Bloomberg noted:
China is the largest exporter of intermediate manufactured goods that can be resold between industries or used to produce other things, so its problems quickly reverberate through global supply chains. Indeed, global reliance on those products doubled to 20% from 2005 to 2015.
But it’s not just China. If global reliance on it for intermediate goods is 20%, the rest of the world accounts for 80%. And, as worryingly, some supply chains are so sophisticated that manufacturers may not realize the ultimate source of essential parts. This morning’s Financial Times reported, “Many companies are unaware that they are exposed to parts shortages because of outbreak.”
Central banks face problems
Traditionally, central banks intervene during troubled times to prop up their economies. And it seems certain most important ones will do so in response to Covid-19. The Bank of Japan, European Central Bank (ECB) and Bank of England have all signaled a willingness to act, presumably with rate cuts, in recent days.
But when the Federal Reserve did so last Tuesday morning, markets responded badly to a shock, half-point cut in interest rates. They seemed to suspect that it was acting precipitously. Was it bending to political pressure from the White House or was it overreacting to stock market falls? More scarily yet, did it know things that investors didn’t?
That suggests central banks will have to tread warily when intervening. But few of them have much room to maneuver anyway. They already have exceptionally low rates (the ECB’s is currently -0.5% — yes, a negative rate) so are limited in their use of that traditional stimulus tool. And quantitative easing (sometimes compared to printing money) brings its own dangers.
Some economists have been warning for years about the dangers of keeping interest rates artificially low during times of good economic growth. They feared that would limit options when the next recession loomed. We may be about to discover whether they were right. And, if so, the extent to which their fears were justified.
Covid-19 likely to spread within US
The Centers for Disease Control and Prevention (CDC) warned on Feb. 23 that the coronavirus would probably spread within American communities. Dr. Nancy Messonnier, director of the National Center for Immunization and Respiratory Diseases, told journalists:
It’s not so much of a question of if this will happen anymore but rather more of a question of exactly when this will happen. … We are asking the American public to prepare for the expectation that this might be bad. … Disruption to everyday life might be severe.
The following day, in a news conference, President Donald Trump provided a more upbeat take on the danger posed. “We’re very, very ready for this,” he said, adding that the risk to the US was “very low” and that he expected the outbreak to end swiftly. He announced that Vice President Mike Pence will lead the administration’s response.
How scary are the health implications?
Overnight figures show Covid-19 has been confirmed in 111,650 (up from 100,696 last Friday) cases around the world, and has killed 3,886 (up from last Friday’s 3,412). Yes, those figures — assuming they’re accurate — show it to be way more infectious than others, such as SARS and MERS. But they also reveal a much lower death rate (3.5%) so far among those infected than that of either SARS (nearly 10%) or MERS (35%).
And that crude death rate calculation is almost certainly too high. Some experts are predicting a final mortality rate of around 1%. But it’s too soon to make definitive judgments.
Mortgage rate volatility ahead?
In coming days and weeks, volatility will likely be driven by changing news cycles. Good news about the virus (and consequently its economic effects) should normally see mortgage rates rise while bad news typically pushes them down. But such news isn’t always reliable.
Scientists are still trying to reach a consensus over many medical aspects of the virus. And governments are increasingly trying to craft narratives that head off panic over both the health and economic consequences of the epidemic. And not all of them are scrupulous about avoiding fake news. For example, some remain suspicious of China’s and Iran’s numbers.
So markets that bend with every passing news cycle may turn out to be “lively,” to say the least. Still, our recent warning that “mortgage rates could bounce up and down like Tigger on E” has so far turned out to be wrong, at least until last week. But it’s too soon to rule out the Tigger scenario in the future.
Economic reports this week
It’s a relatively quiet week for domestic economic reports. But given that, in recent weeks, even seriously important ones have failed to cut through investors’ obsession with Covid-19, that may make little difference.
Unless the coronavirus magically disappears during the next few days, expect none of this week’s reports to make much difference to mortgage rates. The ones that more normally might have done so include Wednesday’s consumer price index (CPI) and Friday’s consumer sentiment index.
But, more normally, any economic report can move markets, as long as 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
This week’s calendar for economic reports comprises:
- Monday: Nothing
- Tuesday: Nothing
- Wednesday: February consumer price index (forecast 0.0%) and core CPI (forecast +0.2%)
- Thursday: February producer price index (forecast -0.1%)
- Friday: March consumer sentiment index (forecast 95.0 index points)
The chances of any of these cutting through the Covid-19 gloom seem slim.
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? Well, Covid-19 has already eaten up this year’s gains in most markets — and, for some indexes, much or all of last year’s.
In its latest poll of US-based economists, conducted March 4-6, Reuters found that many now perceived a higher risk of an imminent or near-term recession that during the same survey in February.
The economists who responded thought the chances of one occurring within a year were 30% up from 23% in February. The same numbers for those who thought one likely within the next two years were 40% and 30% respectively.
The Federal Reserve’s role
And several financial reviews of 2019 warned that stock market rises were largely being fueled by the Federal Reserve’s actions rather than underlying economic strength, though others dispute that.
The suggestion was that some investors see stocks as a one-way bet. If anything goes wrong (virus, economic slowdown … whatever), the Fed will ride to the rescue with lower interest rates and limitless stimulus packages. Last Tuesday’s cut suggests central banks may be unable to deliver the panacea on which such faith is based. And Covid-19 might yet kill the perception they ever could.
But this theory about stock market investors banking on the Fed to rescue them would certainly explain why major indexes were regularly hitting record highs amid so-so economic data and corporate results. On Feb. 16, CNN Business quoted Bleakley Advisory Group chief investment officer Peter Boockvar:
I think the stock market is just under this belief that no matter what comes our way the Fed is going to save us. I honestly believe it’s as simplistic as that.
And, just this morning, The Financial Times warned, “The Federal Reserve faces pressure to keep cutting rates to keep asset prices high.” In any event, Fed-driven market growth this year may be more modest (if it exists at all) than in 2019.
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. Again, that was before Covid-19 became the threat we now perceive it to be. But 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?
Around New Year, it wasn’t hard to find experts who were predicting that mortgage rates could plumb new depths in 2020. And it looks as if they’re being proved right.
However, few of them predicted that a viral epidemic would be the cause of plunging rates. So their kudos is limited.
And we’re yet to see how Covid-19 will play out. What we do know is that mortgage rates are no longer tracking yields on 10-year Treasurys as closely they usually do (see above for the probably reason). And that means the volatility in wider markets is muted for those rates.
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. Fannie’s and the MBA’s were published in February, but Freddie’s latest forecast came out in December:
Freddie Mac reckons that particular mortgage rate averaged 3.9% during 2019. So, if any of those 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 later this year or next, especially if the effects of Covid-19 force the Fed to make its rates negative. But we’ve a long way to go before that becomes a realistic prospect.
However, they already exist elsewhere in the world. 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 signed a phase-one trade agreement with China’s Vice-Premier Liu He.
Although the White House remains proud of that deal, critics are less sure. They point to weaknesses that can’t be resolved until a phase-two deal. And one of those is unlikely until 2021.
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.
And, of course, the impact of Covid-19 is making trade disputes look like a sideshow. Indeed, as countries scramble to prop up global trade, they may become irrelevances.
Rate lock recommendation
We suggest that you lock if you’re less than 30 days from closing. Yes, you’d have made losses if you’d taken that advice in recent weeks. But we’re looking at a risk assessment here: Do the dangers outweigh the possible rewards?
And there might easily be a very sharp bounce if and when Covid-19’s risks are perceived to fade, or when markets decide they’ve gone too far in pricing in the danger it poses. Indeed, some loan officers are expecting one soon and are urging clients to lock even more aggressively than we are.
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 are at or near record lows 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. Make sure your lender is ready to act as soon as you push the button. And continue to watch key markets and news cycles closely. In particular, look out for stories that might affect the performance of the American economy, most especially those that concern the coronavirus. 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.