Forecast plus what’s driving mortgage rates today
Average mortgage rates rose quite sharply yesterday, even by recent standards. You have to go back to March 19 to find a higher rate. And that made a nonsense of our hope (we’ve given up calling them forecasts or even predictions) for that day’s rates.
We still have confidence that the Federal Reserve’s interventions (more on those below) will eventually create a more favorable trend. And we hope to see that show itself today. But the only certainty to emerge from this volatility is uncertainty.
|Conventional 30 yr Fixed||3.813||3.813||+0.13%|
|Conventional 15 yr Fixed||3.813||3.813||-0.19%|
|Conventional 5 yr ARM||3.5||3.5||Unchanged|
|30 year fixed FHA||4.625||5.621||+1.01%|
|15 year fixed FHA||3.5||4.449||+0.13%|
|5 year ARM FHA||3.625||3.667||-0.05%|
|30 year fixed VA||3.5||3.684||+0.32%|
|15 year fixed VA||3.25||3.58||Unchanged|
|5 year ARM VA||3.375||2.717||Unchanged|
|Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here.|
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 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 when indexes are lower
- Gold prices dropped to $1,586 an ounce from $1,626. (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 nudged lower to $20.32 a barrel from $20.58 (Neutral 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 0.59% from 0.69%. A year ago, it was at 2.48%. (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 moved lower to 24 from 27 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 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.
A better day for mortgage rates is highly likely soon. But will it be today? Nobody knows. If it is, it will be because the Fed holds the line against investors who’d like those rates to be higher.
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.
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.
How the Fed’s helping mortgage rates now
In an announcement last Monday, 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.
By March 25, it owned MBSs worth $1.37 trillion. And, that week, its holdings for all assets topped $5 trillion for the first time.
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.
New stimulus package
Last Friday, President Donald Trump signed into law H.R. 748, The Coronavirus Aid, Relief and Economic Security Act (CARES Act), a $2.2-trillion stimulus package.
After recent rises in response to that package, it may feel as if stock markets have largely recovered from their earlier coronavirus falls. But the reality is quite different. Yesterday, marked the end of this year’s first quarter. And Wall Street indexes were down on average 20% over that period.
And that was before President Donald Trump warned in a White House news conference about a “very, very painful two weeks.” And official figures projected American coronavirus deaths in a 100,000-240,000 range.
More pain ahead?
As importantly, investors must surely recognize the possibility of a nasty financial hangover. Last 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 on Tuesday the same newspaper noted, “With the $2 trillion economic stimulus just signed into law on Friday, Washington is already considering a fourth response package to combat the spread of the coronavirus and bolster a shuddering economy.”
Some economists subscribe to modern monetary theory (MMT), which says we shouldn’t be too bothered by large national debts and deficits. But many still will be.
Unemployment could soar
Social media have recently started sharing widely some scary employment numbers contained in a blog published by the Federal Reserve Bank of St. Louis on March 24. It predicted 47.05 million Americans could be laid off during the second quarter of this year, bringing the unemployment rate to 32.1%.
To be fair, the author stressed that this was just one possible outcome based on a model containing several assumptions. And even he referred to them as “back-of-the-envelope estimates.”
But if COVID-19 gets that sort of grip on the American economy (and presumably something similar globally), we could be looking at a transformed world.
Closing help …
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 law that could 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 a big issue for closings
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.”
Those still seem reasonable expectations. 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
COVID-19 stands for Coronavirus disease 2019 and refers to the disease. SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2) is the name of the virus itself. But, whatever you call it, it’s certainly been behind the chaos seen in global markets since Feb. 20. Gosh, a lot can happen in six weeks.
The virus now has a confirmed presence on five continents (none in Antarctica) and in 203 countries and territories. Here at home, the US has 188,647 cases, up from 164,665 yesterday. It ranks No. 1 on a list of countries with the most infections. And, with more than 4,000, we come in third for COVID-19-related deaths, although considerably lower on a per capita basis. But we’ve now had more fatalities than China and have overtaken by some margin the number lost on 9/11. And we’re at an earlier stage of infection than those with higher numbers. So the prospects are grim.
Of the world’s top-10 economies, six now count their infections in the tens of thousands or, in the case of America, Italy and Spain, more than 100,000. All the others have infections in the thousands.
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.
On March 20, The 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 global recession or depression in living memory — perhaps ever.
And, just yesterday, the World Bank warned it expected the pandemic to bring an “unprecedented global shock.”
However, on the plus side, China’s purchasing managers index for its manufacturing sector, which also came out yesterday, rebounded to its highest point since 2017, though from a record low. A silvery lining that suggests that eventually this, too, shall pass.
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 [the] 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 is doing), 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, last week, 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 882,191 (up from 803,187 yesterday) cases around the world, and has killed 44,136 (up from yesterday’s 39,034). 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 (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, on March 19, California state planners 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 mid-March report from Imperial College London projected a worst-case death toll of 2.2 million Americans, though the sorts of containment measures being implemented in some states could halve that.
And many epidemiologists are less pessimistic. Yesterday’s White House news conference suggested American deaths in a range of 100,000-240,000.
Economic reports this week
Domestic economic reports have had almost zero impact on markets since COVID-19 became an issue. They shrugged off even last week’s devastating 3.3 million new filings for unemployment benefits over a seven-day period.
So, while normally this week would be an important one for those reports, it may well turn out to be yet another damp squib.
Still, two reports just might cut through. Tuesday’s consumer confidence index shows how American attitudes are currently holding up amid virus mayhem.
And Friday’s monthly employment situation report will provide a snapshot of the labor market in March. But, of course, only the latter part of that month was seriously affected by COVID-19.
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 important, domestic economic reports comprises:
- Monday: Nothing
- Tuesday: March consumer confidence index (actual 120.0 index points; forecast 115.0)
- Wednesday: March ISM* manufacturing index (actual 49.1%; forecast 43.5%) and February construction spending (actual -1.3%; forecast +0.5%)
- Thursday: weekly jobless claims (forecast 4.0 million new claims).
- Friday: March employment situation report, including nonfarm payrolls (forecast 0 new jobs), unemployment rate (forecast 3.8%) and average hourly earnings (forecast +0.2%). Plus ISM* nonmanufacturing index (forecast 42.0%)
*ISM is the Institute for Supply Management
Only the consumer confidence index and the employment situation report stand much chance of distracting investors from their obsession with COVID-19. And you shouldn’t hold your breath, even for those.
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 have recently been alternately recovering and losing ground.
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 and serious recession.
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. And that without the Fed’s intervention, they’d probably be much higher.
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 turmoil, 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 2nd, 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.