Forecast plus what’s driving mortgage rates today
Average mortgage rates rose yesterday. Normally such a rise would be classed as sharp. But in the current volatility it barely counts as moderate. So far this week, movements have canceled themselves out. And this morning, those rates are adjacent to where they were on Monday morning, which is low by most standards.
In theory, the Federal Reserve’s interventions in the mortgage-bond market should have moderated yesterday’s rise. But taming such a wild and bucking entity isn’t easy. So, while we’re again predicting a quiet day for mortgage rates, with just modest or moderate movements around the neutral line, there are no guarantees.
|Conventional 30 yr Fixed||3.563||3.563||+0.06%|
|Conventional 15 yr Fixed||3.375||3.375||-0.63%|
|Conventional 5 yr ARM||3.5||3.5||Unchanged|
|30 year fixed FHA||2.75||3.73||Unchanged|
|15 year fixed FHA||3.25||4.198||+0.13%|
|5 year ARM FHA||3.5||3.706||+0.05%|
|30 year fixed VA||3.063||3.242||Unchanged|
|15 year fixed VA||3.5||3.833||+0.25%|
|5 year ARM VA||3.25||2.767||Unchanged|
|Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here.|
Details of the Fed’s role in buying mortgage-backed securities (see below) emerged today. During the week ending March 25, its holdings of those securities grew to $1.37 trillion. Imagine where rates would be without that support. In the same report, it emerged that the Fed’s overall holdings that week broke the $5 trillion barrier for the first time ever.
Market data affecting (or not) today’s mortgage rates
We still see no reason to think markets are currently providing many clues as to what may happen to mortgage rates today. But, in the hope you have insights that we’re missing, here’s the state of play. By approaching 10 a.m. (ET), the data, compared with roughly the same time yesterday morning, were:
- Major stock indexes were all appreciably 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 when indexes are lower
- Gold prices edged down to $1,649 an ounce from $1,662. (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. But if they’re not worried now …
- Oil prices moved lower to $21.62 a barrel from $23.46 (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 0.74% from 0.80%. A year ago, it was at 2.39%. (Good for mortgage rates.) More than any other market, mortgage rates normally tend to follow these particular Treasury bond yields, though less so recently
- CNN Business Fear & Greed index inched higher to 22 from 21 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
*A change of a few dollars on gold prices or a few cents on oil ones is a tiny fraction of 1%. So we only count meaningful differences as good or bad for mortgage rates.
Today may be a relatively quiet one for mortgage rates. But such predictions mean little while this March madness continues.
Rate lock advice
Based on today’s mortgage rates and market movements, 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.
The Fed might end up pushing down rates over the coming weeks, though that’s far from certain. And so far all it appears to have done is put a brake on sharp rises. More importantly, the coronavirus has created massive uncertainty — and disruption that seems capable of defying in the short term all human efforts, including perhaps the Fed’s. So locking or floating is a gamble either way.
The Fed’s helping mortgage rates now
In an announcement on Monday morning, the Federal Reserve said it was lifting the cap of $200 billion that it had, just days earlier, placed on its purchasing of mortgage-backed securities (MBSs). For now, there would be no limit on how much it would spend buying these.
MBSs are bond-like bundles of mortgages that are traded on a secondary market. And it’s the price of these rather than anything else that determines your mortgage rate.
For reasons explained near the end of this article, the higher the price of MBSs, the lower the rate you’ll pay. Given that the Fed is a uniquely huge new buyer in that market, it should generate increased demand that raises MBS prices and so creates lower yields and mortgage rates.
So that’s the theory. But we’ve seen a lot of those crumble to dust in recent weeks. And only time will tell how well this one holds up in practice.
Yesterday was the day when:
- America leapfrogged Italy and China to become the country with the most COVID-19 coronavirus infections ever
- Weekly jobless figures revealed that 3.3 million Americans newly applied for unemployment benefits within seven days — a grizzly all-time record for such claims
- A new stimulus bill inched closer to becoming law that might see the US running an annual deficit in excess of $4 trillion (excluding another $4 trillion the Fed’s likely to put in)
- Stock markets continued a three-day rally, which saw the S&P 500’s best such run since 1933
If you think that fourth bullet point is incongruous to the point of irrationality when viewed with the others, join the club.
But it’s worth noting that such so-called dead-cat bounces (brief and followed by even sharper falls) have been common features of stock markets during times of acute economic stress from 1929 through 2008/9. And stock markets this morning may be making some small progress toward sanity.
New stimulus package
On Tuesday, the US Senate passed a $2.2-trillion stimulus bill. It’s set to go to the House today and could be on the Resolute desk by this evening. President Donald Trump says he’s planning a “beautiful” signing as soon as possible.
Stock markets were ecstatic about the bill on Tuesday and have remained happy since, at least until this morning. But there’s a possibility of a nasty financial hangover. Wednesday’s New York Times quoted analysts at the Eurasia Group:
The U.S. is likely on pace for an annual deficit of at least $4 trillion and likely higher, in the range of 15-20 percent of G.D.P. [gross domestic product].
And, as The Guardian noted yesterday: “But many on Wall Street appear uncertain that the stimulus package, together with a Federal Reserve pledge of nearly $4tn in aid, will counter the havoc an uncontained coronavirus outbreak could still wreak.” In other words, more stimulus money may yet be needed.
Closing help … and a big issue
Closing on a real estate transaction is hard enough without the extra obstacles erected by social distancing and lockdowns. So some are trying to dismantle the biggest barriers.
Legislators are currently working on a bill that will further facilitate remote, electronic signing of closing documents. That’s generally already legal under the Electronic Signatures in Global and National Commerce Act (E-Sign) and various state laws. But a new bipartisan bill is intended to make it easier and more commonplace.
And Fannie Mae, Freddie Mac and probably others are being less strict about some aspects of verification. So, perhaps, your employer, working from home without access to paper files, may be able to certify your employment by email rather than provide documentary evidence.
But another obstacle may prove more difficult to surmount. In New York (and presumably other states already or soon), government recording offices have been closed.
And, without the access to title searches and deed filings those provide, purchases and refinancings may stall. Maybe someone will come up with a workaround — as they are doing for those other issues. But, right now, it’s hard to see how people will be able to close without title searches.
An economist says …
On March 16, realtor.com® Chief Economist Danielle Hale thought lower rates were coming. “That [Fed buying of MBSs] should stabilize rates and bring them back down lower,” she said on her employer’s website. “They’ll [likely] go back to the low 3% [range]. Might we see rates below 3%? I wouldn’t rule it out.”
But how much good that will do buyers and homeowners who are refinancing who can’t close transactions is unclear. If you’re in the process of purchasing a home or are midway through a refinance, you might want to get your skates on.
Virus still the biggest factor for mortgage rates
The Wuhan coronavirus (COVID-19, standing for Coronavirus disease 2019) has certainly been behind the chaos seen in global markets since Feb. 20. Gosh, a lot can happen in a matter of weeks!
The virus now has a confirmed presence on five continents (none in Antarctica) and in 199 countries and territories. Here at home, the US has 85,755 cases, up from 68,814 yesterday. It now ranks No. 1 on a list of countries with the most infections, having yesterday leapfrogged China and Italy.
And that American number may be much higher in reality: A shortage of kits and the cost (until very recently) to uninsured patients of testing mean many more cases must surely go unconfirmed than in countries without those issues. And even those nations acknowledge huge gaps between their confirmed numbers and their actual infection rates, sometimes using multipliers of 20, 25 or even more.
Dozens of countries have confirmed infections in the thousands or tens of thousands. And, of the world’s top-10 economies, only India — which recently went into a full lockdown for its more than 1-billion population — has fewer than 1,000 reported cases. And its underresourced health service may mean it’s actually already well into four figures.
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 when trading is the virus’s economic consequences, which are a byproduct of the medical ones.
Last Friday’s New York Times “Deal Book” newsletter summed up how many investors and economists see the near and medium-term future:
Economists have been slashing their forecasts, and the numbers are grim, especially for the second quarter. But what real difference does it make if Goldman Sachs thinks the U.S. economy will shrink by 5% and Deutsche Bank expects a 13% fall? It’s going to be bad, and the shape of the downturn is what many are focusing on now.
Forecasts are changing so quickly that there’s little point in trying to keep up with them. Just know that many economists expect COVID-19 to bring the worst recession or depression in living memory — perhaps ever.
The dangers of global connectedness
Globalization has brought much more sophisticated and diverse supply chains. So, for example, 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 worryingly, some supply chains are so sophisticated that manufacturers may not realize the ultimate source of essential parts. On March 9, The Financial Times reported, “Many companies are unaware that they are exposed to parts shortages because of outbreak.”
With so many businesses currently shuttered, this may not make much difference for now. But, when the danger passes and countries begin to reopen businesses (as China has done), problems will remain. Those who recover first may find little demand for their goods with many of their customers still on hiatus. And reestablishing supply chains may take time and money.
Central banks face problems
Traditionally, central banks intervene during troubled times to prop up their economies. And they mostly have in response to COVID-19. But markets have often reacted badly to those interventions.
And, with much of their armory already depleted, some are wondering how much more they can do. “Whatever it takes” is a better slogan than plan.
However, yesterday morning, Federal Reserve Chair Jay Powell took to the airwaves to assure investors that his organization will “never run out of ammunition.”
How scary are the health implications?
Overnight figures show COVID-19 has been confirmed in 552,600 (up from 490,271 yesterday) cases around the world, and has killed 25,042 (up from yesterday’s 22,156). 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 (4.5%) 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% — about 10 times that of seasonal flu. But it’s too soon to make definitive judgments.
However, On March 11, German Chancellor Angela Merkel said she expected 70% of all Germans to eventually be infected by COVID-19. That’s not too far off the UK government’s March 3 forecast of 80% for its population. Meanwhile, California state planners last week projected a possible 56% infection rate within eight weeks, which presumably might rise close to those European estimates over a longer period.
If those worst-case projections turn out to be roughly correct and that infection rate occurs globally, the coronavirus’s final toll could be enormous, even with a 1% mortality rate. If 75% of the world’s population (of 7.7 billion people) becomes infected and 1% of those die, that’s 58 million deaths. A recent report from Imperial College London projected a worst-case death toll of 2.2 million Americans, though additional containment measures could halve that.
Economic reports this week
There have been some normally important publications on this week’s calendar of economic reports. But recently, even the most important ones have failed to cut through investors’ obsession with COVID-19 and its resulting stimulus packages.
And that’s understandable. Just how relevant is gross domestic product (GDP) in the last quarter of 2019 or personal income data for February when the entire economic landscape has been transformed since?
So expect none of this week’s reports to have much direct impact on mortgage rates. Except …
Consumer sentiment and employment numbers could cut through
Well, maybe two will turn out to be exceptions. Today’s consumer sentiment number shows how Americans are currently reacting to the new economic environment.
And, yesterday, there was another that might have caused waves. We don’t usually bother mentioning new claims for unemployment assistance because they’re weekly figures. And that makes them easily dismissed by markets as volatile outliers, even on those rare occasions when they’re interesting.
But this week’s report was mind-blowing. MarketWatch was forecasting it could hit 2.5 million new claims, up from 280,000 last week. And the reality was even worse: 3.3 million. That’s an off-the-charts record rise that brings home starkly COVID-19’s economic devastation.
But not starkly enough to put off stock investors. Their markets yesterday continued a three-day spree.
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: February’s new home sales (actual 765,000 new homes sold, annualized; forecast 750,000)
- Wednesday: February’s durable goods orders (actual +1.2%; forecast 0% unchanged) and core capital goods orders (actual -0.8%; forecast -0.5%)
- Thursday: weekly jobless claims (actual 3,283,000 new claims; forecast 2.5 million; previous week’s actual 281,000). Plus GDP for the last quarter of 2019 (actual +2.1%; forecast +2.1%) and February’s advance trade in goods (actual -$59.9 billion; forecast -$63.5 billion)
- Friday: March consumer sentiment (actual 89.1 index points; forecast 89.0). Plus February personal income (actual +0.6%; forecast +0.4%), consumer spending (actual +0.2%; forecast +0.3%) and core inflation (actual 0.2%; forecast +0.2%)
Yesterday and today were the ones with the potential to be important days. Yesterday turned out to mean nothing. But today’s consumer sentiment figure came out just as we were publishing. So we haven’t had time to assess its impact.
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 a lot of the recent gains, though markets recovered some ground earlier this week.
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.
At the risk of being accused of understatement, expect April’s survey to show much higher numbers predicting an imminent recession.
The Federal Reserve’s role
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 saw stocks as a one-way bet. If anything went wrong (virus, economic slowdown … whatever), the Fed would ride to the rescue with lower interest rates and limitless stimulus packages.
But its March 3 and March 15 cuts suggest central banks may struggle 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.
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.
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 were right — though it’s so far unclear how long uberlow rates will last.
However, few of them predicted that a viral pandemic 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 have recently not been tracking yields on 10-year Treasurys as closely they usually do.
But 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 figures were published in March, and are thus more able to recognize the emerging effects of the coronavirus, though they may not have anticipated the speed of developments. But Freddie’s latest forecast came out in December (it’s chosen to update them quarterly) and so may be the least reliable:
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, such negative mortgage rates already exist elsewhere in the world. Denmark’s Jyske Bank was last year 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.
More importantly, the impact of COVID-19 is making trade disputes look like a sideshow. Indeed, as countries scramble to prop up global trade, they may be effectively abandoned and become irrelevances.
Rate lock recommendation
We suggest that you lock if you’re less than 30 days from closing. But we’re looking at a personal judgment on a risk assessment here: Do the dangers outweigh the possible rewards?
Right now, we’re keeping that advice under constant review. The impacts of COVID-19 and the Fed’s quantitative easing just might drag those rates lower — possibly to new lows — sooner than currently seems likely. But, after recent dramatic rises, that’s far from certain. And, amid the current March madness, it may not happen at all.
However, none of this means we generally 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.Verify your new rate (Jun 1st, 2020)
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.