Forecast plus what’s driving mortgage rates today
Average mortgage rates rose yesterday for a second consecutive day. And they’re back where they were last Tuesday. So recent gains are being eroded. Still, it’s not time to panic yet because they remain exceptionally low.
But the last couple of days’ increases are a reminder that even the Federal Reserve’s unlimited purchases of mortgage bonds (read on for an explanation) can’t guarantee consistent falls in mortgage rates.Find and lock current rates. (Sep 18th, 2020)
|Conventional 30 yr Fixed||3.625||3.625||Unchanged|
|Conventional 15 yr Fixed||3.563||3.563||-0.06%|
|Conventional 5 yr ARM||3.5||3.5||Unchanged|
|30 year fixed FHA||3.625||4.612||Unchanged|
|15 year fixed FHA||4||4.953||Unchanged|
|5 year ARM FHA||3.875||3.854||Unchanged|
|30 year fixed VA||3.313||3.494||Unchanged|
|15 year fixed VA||3.625||3.959||Unchanged|
|5 year ARM VA||3.625||2.9||Unchanged|
|Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here.|
Still, we remain optimistic that, overall, the Fed will prevent the most serious rises and may perhaps continue to push mortgage rates lower in coming days and weeks.
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 this morning. By about 9:50 a.m. (ET), the data, compared with roughly the same time yesterday morning, were:
- Major stock indexes were appreciably lower. (Good for mortgage rates.) When investors are buying shares they’re often selling bonds, which pushes prices of those down and increases yields and mortgage rates. The opposite happens when indexes are lower
- Gold prices fell to $1,749 an ounce from $1,769. (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 dropped to $19.98 a barrel from $21.60 (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 decreased to 0.66% from 0.73%. A year ago, it was at 2.59%. (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 nudged down to 41 from 45 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.
Monday’s and yesterday’s rises may turn out to be a blip. But don’t bank on it. Daily mortgage rates are effectively unpredictable. Because they remain untethered from markets — and markets from reality.
Still, we hope the Fed will hold the line against investors who’d like those rates to be significantly higher. And that a trend that’s benign will eventually emerge, punctuated with rises that aren’t too frequent, too sustained or too sharp.
Rate lock advice
We changed our recommendation yesterday to reflect what we hope will turn into a continuing downward trend. I personally recommend:
- LOCK if closing in 7 days
- LOCK if closing in 15 days
- FLOAT 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 you can expect bad patches.
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.
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How the Fed’s helping mortgage rates
In an announcement on March 23, the Federal Reserve said it was lifting the previous cap on its purchases of mortgage-backed securities (MBSs). For now, there would be no limit on how much it would spend buying these.
MBSs are bond-like instruments: bundles of mortgages that are traded on a secondary market. Picture a tall pile of different closing documents tied up with string and you’re probably getting the concept of an MBS, even if the reality is often more digital. Chances are, your existing mortgage is tied up in just such a bundle and forms part of one MBS.
And, if you’re currently buying or refinancing a home, it’s the going price of these bundles on that secondary market that more than anything else determines your next 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 for investors — and lower mortgage rates for you.
Fed’s been buying $1 million in assets every second
Last Monday’s Financial Times reported, “The US central bank bought more than $1m of assets per second over past two weeks.” [Our emphasis.] While MBSs are only a part of those purchases, the Fed’s clearly not holding back.
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.
Challenges to the Fed’s program
That Fed program took a while to have an effect on mortgage rates. Indeed, it was only last Tuesday that they first dipped lower than they were on March 23, when unlimited purchases were announced. So how come there was a delay?
Well, there’s a lot going on here. But a big reason may be a resurgence in new applications from consumers for mortgages and especially refinances. During the seven days ending March 27 those refinances were up 168% on the same period in 2019, according to the Mortgage Bankers Association.
But its latest figures, released last Wednesday, suggest that excess demand was easing off during the week ending April 3. Even so, refinance applications were still 144% higher than they were a year earlier.
And current, near-record lows for these rates may push up applications this week. New figures for that period are due out today and we’ll update you tomorrow.
Fed may now be main player
Investors hate refinances, especially if they’re for mortgages that are recent. Each sees a mortgage pulled from an MBS bundle — and a reduction of income and profit on that MBS. Indeed, some investors make losses on especially fast refinancings.
So the last thing they want is to replace lost mortgages with ones at an even lower rate. And, understandably, they shy away from MBSs. But supply and demand mean that inevitably pushes up mortgage rates.
So the Fed is trying to resist the market forces that arise when investors vote so decisively with their feet. We still think it likely (though far from certain) that it will get its way in the end and push mortgage rates even lower. But don’t expect a smooth ride.
Fly meets ointment
Now, there’s another issue rearing its head. Lenders that aren’t banks face cash flow issues arising from the pandemic. Many homeowners are already unable to make their monthly payments in full (see “They’re already struggling with mortgage and rent payments,” below).
And that problem’s likely to get only worse as unemployment and underemployment soar. Importantly, those non-bank lenders currently originate more than half of all residential mortgages. If they find themselves without the cash to lend, the supply of new mortgages could diminish.
And, of course, a reduced supply of any product tends to push prices (or rates in this case) upward. This happens further down the mortgage production line than where the Fed is tinkering — and where higher prices mean lower yields and rates. So we may sometimes see (or have already seen) higher rates that are unconnected with MBS prices.
The federal government and regulators are currently exploring ways to help out nonbank mortgage lenders. Of course, actual banks’ mortgage operations are also struggling. Just yesterday, Wells Fargo and JPMorgan Chase unveiled dire figures. But, it’s hoped, they may be in a better position to weather the storm unaided.
You can now understand why we said there’s a lot going on here.
More pain ahead?
Investors continue to ignore the possibility of a nasty financial hangover after the stimulus. Last Thursday, we learned from official figures that more than 16 million Americans have filed new claims for unemployment insurance within the previous three weeks. Millions more are likely to have done so this week and we’ll see those numbers tomorrow.
And on March 25, The 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].
Now, legislators are already working on a new stimulus bill that could take the deficit above that range.
Some economists subscribe to modern monetary theory (MMT), which says we shouldn’t be too bothered by large national debts and deficits in advanced economies. But many still will be.
Unemployment could soar
You may have seen some scary employment numbers on social media. Those likely came from 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 (April through June) 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, as mentioned, we’ve already seen nearly 17 million jobs lost in three weeks, So that projection may not be as fanciful as it appeared when it was first published. And 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, digital 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 at a national level.
Meanwhile, states are trying to help in similar ways. For example, Georgia Gov. Brian Kemp recently signed an executive order allowing, subject to rules, the remote notarization and witnessing of documents via live video links.
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.
Appraisals sometimes avoidable
Many lenders are already allowing “drive-by” (exterior only) home appraisals or even wholly remote ones based on desk research.
Yesterday, National Mortgage Professional magazine reported on a new federal government initiative to get past appraisal issues. Soon, government-backed loans may no longer need a home appraisal prior to closing, subject to rules and limits:
Federal banking agencies have decided to issue a deferral on appraisals and evaluations for real estate properties as detailed in a joint press release. The interagency statement outlines the parameters of the deferrals and revealed that there is no appraisal necessary for refinance transactions valued at $400,000 or less. Appraisals and evaluations can be made up to 120 days after the closing of a loan transaction.
… But a big issue for closings
But another closing obstacle may prove more difficult to surmount. Many county recording offices have been closed.
And, without access to the title searches and deed filings those provide, some purchases and refinancings may stall. The industry is working to overcome this obstacle. But its response is patchy, as legal website JD Supra reports:
Title insurance companies have issued underwriting bulletins confirming they will provide title insurance coverage for transactions that occur when recording offices will not accept documents for recording. Each title company has its own requirements and limitations, so it is important to confirm those requirements on a closing-by-closing basis.
An economist writes …
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 predictions are looking good. However, they’re not universally shared so you shouldn’t rely on them for future trends. On April 2, the Mortgage Bankers Association’s economists forecast that the rate for a 30-year, fixed-rate mortgage would average 3.6% between now and the start of October — a higher rate than they were forecasting in March.
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 less than eight weeks.
The virus now has a confirmed presence on five continents and in 210 countries and territories. Overnight figures show COVID-19 has been confirmed in 2,018,449 (up from 1,941,029 yesterday) cases around the world, and has killed 128,063 (up from yesterday’s 120,926).
Here at home, the US has 614,246 cases, up from 587,815 yesterday. It ranks No. 1 on a list of countries with the most infections, with roughly as many as the next four worst affected added together. And now more than one-in-four of all those who have or have had the disease live in America, in spite of our being home to fewer than one-in-20 of the global population.
Worse, with 26,064 (23,654 yesterday), we are, tragically, also first for COVID-19-related deaths, although considerably lower on a per capita basis. But we’re at an earlier stage of infection than others with higher per-head numbers. So the prospects are grim.
COVID-19 hitting biggest economies hard
Of the world’s top-10 economies, nine now count their infections in the tens of thousands. Or, in the case of America, Italy, Germany and France, more than 100,000. The 10th has infections in the high thousands.
With the exception of Iran and Turkey, the worst-hit nations are major economies. That’s probably because those are so interconnected and so many people routinely move between them for business or pleasure.
But an even bigger human tragedy may emerge later in less developed countries, many of which lack medical resources and expertise while having many densely packed slums in which isolation and social distancing are next to impossible.
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.
Domestic economic worries
Just yesterday, two reports emerged that should act as a warning of the seriousness of the likely impact of the pandemic on the American and global economies.
First, JPMorgan Chase forecast “a fairly severe recession” as it unveiled profits that were down 69% in the first quarter of the year.
And, secondly, the International Monetary Fund (IMF) issued a fairly dire warning. According to a report in The Financial Times:
The coronavirus crisis will leave lasting scars on the global economy and most countries should expect their economies to be 5 per cent smaller than planned even after a sharp recovery in 2021, the IMF said on Tuesday.
Forecasting that this year would be the worst global economic contraction since the Great Depression of the 1930s, Gita Gopinath, the fund’s chief economist, said the world outlook had “changed dramatically” since January with output losses that would “dwarf” the global financial crisis 12 years ago.
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.
Americans already struggling with mortgage and rent payments
Inevitably, the financial pain felt by many Americans is beginning to impact the housing market. A survey by Apartment List, published last Wednesday, found that one in four Americans failed to pay their housing costs in full this month. And homeowners were unable to make their full mortgage payments roughly as frequently as tenants struggled with their rents.
Twelve percent of respondents made no payment and about the same proportion made a partial one. Perhaps surprisingly, the report says that nearly 17% of households making six-figure incomes weren’t able to pay in full.
You can see why non-bank mortgage lenders are worried about their liquidity.
But markets seem untethered from reality
We said above that markets are untethered from reality. That is, of course, a value judgment. But it’s hard to see why, for example, the S&P 500 had by the Easter weekend bounced back 25% since its low on March 23.
Aren’t investors seeing the same death tolls, infection rates, unemployment rates and gross domestic product forecasts as the rest of us? Do they think company earnings won’t take severe hits?
On April 10, The New York Times offered a possible explanation: Markets see all that. But they hope the federal government’s and Federal Reserve’s mass pumping of trillions in cash into the economy will see the big companies in which they invest emerge largely unscathed.
Indeed, they perceive huge numbers of newly unemployed Americans each week as a plus. Because, politically, those force the administration and Congress to pump in yet more money.
All this depends on a very quick economic recovery. And maybe Wall Street expectations of one will be proved right. But you may wonder whether they should be betting so big on so many unknowable variables. And we’ll continue to say they’re untethered from reality.
Economic reports this week
Don’t expect any domestic economic reports published this week to have much, if any, effect on wider markets. For several weeks, these have been all but ignored by investors — even those shocking numbers of newly unemployed we’re getting used to seeing each Thursday.
You may legitimately be surprised those employment numbers are shrugged off. But it’s easy to see why many others are. In such a fast-moving environment, numbers for retail sales or industrial production (both released on Wednesday) for March are already way out of date. They’re no indicators of today’s reality.
The pandemic had a much looser grip just last month (it only feels as if we’ve been in this situation forever) so data for that period have little relevance now.
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: Nothing
- Wednesday: March retail sales (actual -8.7%; forecast -7.1%) and retail sales excluding autos (actual -4.5%; forecast -4.9%). March industrial production (actual -5.4%; forecast -4.0%) and capacity utilization (actual 72.7%; forecast 73.3%)
- Thursday: Weekly jobless claims to April 12 (forecast 5.0 million new claims for unemployment insurance). March housing starts (forecast 1.295 million new homes started) and building permits (1.270 million new residential permits issued)
- Friday: Nothing
So Wednesday and Thursday are the days to watch. Just don’t expect to see much reaction in markets.
Rate forecasts for 2020
Earlier, we reminded you of John Kenneth Galbraith’s warning not to take economists’ forecasts too seriously. 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. Freddie’s numbers came out on Monday and the MBA’s figures were also published in April. Fannie’s were released in March:
Interestingly, in its April 2 forecast, the MBA showed higher rates than in its March publication. If you’re waiting for even cheaper mortgages, you might see that as a red flag. However, note Freddie’s more optimistic April 13 numbers, which mirror Fannie’s March ones. You pays yer money …
Still, all forecasts show lower rates this year than last, when that particular one averaged 3.9%, according to Freddie Mac.
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.
Rate lock recommendation
I suggest that you lock if you’re less than 15 days from closing. But we’re looking at a personal judgment on a risk assessment here: Do the dangers outweigh the possible rewards?
At the moment, the Fed mostly seems on top of things, though the last couple of days underscore widespread uncertainty. And we think it likely it will remain so over the medium term. But that doesn’t mean there won’t be upsets along the way. It’s perfectly possible that we’ll see periods of rises in mortgage rates, not all of which will be manageable by the Fed.
That’s why we’re suggesting a 15-day cutoff. In my view, that optimizes your chances of riding any rises while taking advantage of falls.
Only you can decide
But, 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.
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 (Sep 18th, 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.