Forecast plus what’s driving mortgage rates today
Average mortgage rates held steady last Friday, giving borrowers a second chance to lock at a record-low rate. If you ignored that opportunity first time, you might want to consider revisiting that decision.
But it depends how far out you are from closing. If you’ve ages to go, you might choose to bet on rates going lower. But there’s a chance they’ll rise again, perhaps temporarily and possibly soon. So, if you’re going to have to lock within a couple of weeks, you could find yourself trapped at a higher rate.Find and lock current rates. (Jun 2nd, 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||2.75||3.73||Unchanged|
|15 year fixed FHA||4||4.953||Unchanged|
|5 year ARM FHA||3.75||3.748||Unchanged|
|30 year fixed VA||3.063||3.242||Unchanged|
|15 year fixed VA||3.625||3.959||Unchanged|
|5 year ARM VA||3.75||2.891||Unchanged|
|Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here.|
But, for now, little’s changed. And we remain optimistic that, overall, the Federal Reserve will prevent the most serious rises and may perhaps push mortgage rates even lower in coming days and weeks.
However, there’s a lot going on here. And the Fed can only influence some of the forces that affect mortgage rates. So nothing is assured. Read “This week,” below, to discover the essential details.
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 last Friday morning, were:
- Major stock indexes were moderately higher. (Bad 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 $1,732 an ounce from $1,754. (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 tumbled to $12.27 a barrel from $17.64 (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 nudged higher to 0.63% from 0.61%. A year ago, it was at 2.54%. (Bad for mortgage rates.) More than any other market, mortgage rates normally tend to follow these particular Treasury bond yields, though much less so recently
- CNN Business Fear & Greed index rose to 42 from 37 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.
Right now, daily 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
I changed my recommendation recently to reflect the success so far of the Fed’s actions. 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 further 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.
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. However, as you’re about to discover, it’s not the only determinant.
For reasons explained near the end of this article, it’s a mathematical certainty that 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
On April 5, The 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. And there’s little reason to think it’s scaling back its activities yet.
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 on April 6 that they first dipped lower than they were on March 23, when unlimited purchases were announced. So how come there was a delay? And why do we still see some rises?
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.
Since late in March, refinances have been elevated, according to the Mortgage Bankers Association (MBA). So, last week, the number of new applications for refinancings was 192% higher than the same week one year ago. And last Wednesday’s MBA data, for the week ending April 17, showed them 225% up on the same period in 2019.
So no surprises there. As you’d expect, current, record or near-record lows for these rates are tempting more homeowners to refinance. But there’s one problem …
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 actual losses on especially fast refinancings.
So the last thing they want is to replace lost mortgages with ones at an even lower rate and yield. And, understandably, they’re shying away from MBSs. But the law of supply and demand means that lower demand inevitably pushes up mortgage rates. (Remember that counterintuitive point about lower bond prices meaning higher yields and 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 stabilize the market, perhaps pushing mortgage rates even lower in the process. 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. Millions of homeowners are already unable to make their monthly mortgage payments in full.
“As of April 23, 2020, more than 3.4 million homeowners — or 6.4% of all mortgages — have entered into COVID-19 mortgage forbearance plans,” according to a news release issued last Friday by Black Knight.
And that means some loans that are in lenders’ “warehouses” (that are waiting to be sold) are already turning bad before they even reach the secondary market as delinquencies and defaults become more common.
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 with warehouses overflowing with unsellable MBSs, that could leave them without the cash to lend. And that would see the supply of new mortgages diminish.
Possible removal of fly
But, last Tuesday, the Federal Housing Finance Agency (FHFA) announced that it was capping lenders’ (or, more accurately, servicers’) liability for forbearance issues to four months of payments. Still, Black Knight reckons that will still leave them with revenues reduced by more than $7 billion.
We’ll have to wait to see if that FHFA cap takes off the pressure. You’d think limiting liability would at least make it easier for mortgage companies to borrow to cover their shortfalls. If things work out that way, it should restore the supply of mortgages.
Meanwhile, the FHFA last Wednesday said that Fannie Mae and Freddie Mac could buy loans that are in forbearance. But insiders are outraged by the deals on offer, according to Inside Mortgage Finance magazine. Because those include “steep loan-level price adjustments,” which mean worse returns for mortgage companies.
Higher rates that are unconnected to MBS prices
Meanwhile, of course, while we’re waiting to see how the FHFA’s initiatives play out, a reduced supply of any product tends to push prices (or rates in this case) upward. This supply issue happens further down the mortgage production line than where the Fed is tinkering — and than where higher prices mean lower yields and rates.
And a similar thing happens when lenders who can’t cope with sudden tsunamis of demand try to manage their workloads. They deter would-be borrowers through higher rates. So we may sometimes see (or have already seen) higher rates that are unconnected with MBS prices.
You can now understand why we said there’s a lot going on here.
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 still looking sensible. However, they’re not universally shared. So you shouldn’t totally rely on them for future trends.
For example, 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.
But, having said that, Fannie Mae and Freddie Mac unveiled their rates forecasts in mid-April (details below). And they both expect them to head lower, more in line with Danielle Hale’s prediction. Indeed, Fannie’s expecting that rate to dip to 2.9% in 2021.
What should you conclude from this? That nobody’s sure about much.
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 10 weeks.
Until last Friday, we’d been reporting daily the number of infections and deaths both globally and in the US. But, unlike when we started doing so, those are now widely reported across the media. And our repeating them seems unnecessary. After all, it’s only the virus’s economic impact that affects mortgage rates.
COVID-19 hitting biggest economies hardest
Of the world’s top-10 economies, five (America, Italy, France, Germany and the UK) now count their infections in the hundreds of thousands. All the other five count them in the tens of thousands.
Of course, no country has sufficient testing to accurately record its actual infection and death rates. But some may also be manipulating them for political purposes. So it’s perfectly possible that more than five of those top-10 economies actually have 100,000+ infections.
With the exception of Iran, the worst-hit nations are major economies. That’s probably because those are so interconnected and so many people were routinely moving between them for business or pleasure before travel restrictions were implemented. But emerging economies are likely to be hit hard soon. And the human costs in those could be higher than in advanced nations.
But, while markets are made up of people who share the fears 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 Monday’s collapse in oil prices was partly technical. It was for oil that would be delivered almost immediately and reflected the fact that storage facilities are already very nearly full. But with global demand still so low owing to the pandemic, that shortage of storage capacity isn’t likely to go away. Prices have rebounded since they entered negative territory for the first time ever. But they’re still extremely low.
True, these low prices should eventually benefit consumers at gas stations. But they could also see hundreds of US companies involved in oil exploration and drilling and fracking in real trouble — along with those who lent to them or invested in them.
Meanwhile, countless other sectors are severely affected, from airlines to restaurants and leisure — and from automakers to financial institutions.
Economists are currently predicting that this week’s GDP figures for the first quarter of this year will show a 3.5% contraction in the US economy., according to MarketWatch But research firm Capital Economics revealed last Friday its expectations for the second quarter. And those are of a whopping 40% contraction between April 1 and June 30.
Consumer spending down
We can already see the impact on consumer spending of COVID-19’s jobs toll, which in America stands at over 26 million. Last week, Discover reported on its cardholders’ year-over-year activity so far in April:
Discretionary spend is down 33%, driven by the travel category, which, although only 8% of cardholder spending, is down 99%, and by retail, which is down 11%.
And, also last week, American Express said its cardmembers were similarly cutting back, with spending on travel and leisure down 95% in April. Amex has already set aside $1.7 billion to cover losses. And it warned that more will be needed
Few economists think we’ll escape a recession and some expect a depression.
Last week, a senior policymaker at the Bank of England (Britain’s central bank, so its equivalent of the Fed) suggested: ” … we are experiencing an economic contraction that is faster and deeper than anything we have seen in the past century, or possibly several centuries.”
And such mayhem looks unlikely to be confined to Europe. On April 14, the International Monetary Fund (IMF) issued a fairly dire warning. According to a report that day 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
Of course, such forecasts are justifiably worrying and must be taken seriously. But don’t assume that they’re going to prove wholly accurate.
A headline in last Monday’s Financial Times summed up the situation during this pandemic when so little is certain: “Banks are forecasting on gut instinct — just like the rest of us.”
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.
Meanwhile there’s cause for concern about the US national deficit and debt. Last Friday, the Congressional Budget Office published its estimate for the US deficit in 2020. It put it at $3.7 trillion.
That includes last week’s $484 billion stimulus bill. But not any similar measures that might be needed in coming months.
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.
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. Or why, last Friday, the forward price-to-earnings ratio for S&P 500 companies hit its highest level since December 2001.
Last Saturday’s Financial Times ran the headline, “Wall Street bets on a Big-Tech rebound.” But within the article said, “Valuations do not reflect the risks that still lie ahead from coronavirus.”
Aren’t investors seeing the same death tolls, infection rates, unemployment rates and GDP forecasts as the rest of us? Do they think company earnings aren’t taking severe hits?
Sly like a fox? Or not?
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 of dollars into the economy will see the big companies in which they invest emerge largely unscathed — or even stronger as smaller competitors go to the wall.
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.
But this strategy’s success depends on a very quick economic recovery (a so-called V-shaped recession) once the COVID-19 threat dissipates. Yes, 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 be too shocked that investors are shrugging off virtually every domestic economic report. The landscape has changed so profoundly in the last few weeks that most data for March and the first quarter are already so out of date as to be next to useless. They largely reflect a pre-coronavirus world.
But, as we explained in the previous section, markets seem determined to go their own way, no matter what the real world is doing. So it would be no surprise if they ignored this week’s April figures, too. Those include the consumer confidence index on Tuesday and the Institute of Sales Managers’ (ISM’s) manufacturing index on Friday.
The Federal Open Market Committee (FOMC) is meeting this week. That’s the Federal Reserve policymaking body that determines the organization’s interest rates. Watch out for a news conference at 2:30 p.m. (ET) on Wednesday, led by Fed Chair Jerome Powell. Few expect any surprise announcements but Powell’s commentary will be closely watched.
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: April consumer confidence index (forecast 90.0 index points) and March advance trade in goods (forecast -$56.0 billion)
- Wednesday: gross domestic product (GDP) for the first quarter (forecast -3.5%), pending home sales index for March (no forecast but +2.4%) in February. FOMC news conference
- Thursday: Weekly jobless claims to April 25 (forecast 3.50 million new claims for unemployment insurance). March personal income (forecast -1.5%), consumer spending (forecast -6.9%) and core inflation (forecast -0.2%)
- Friday: April ISM manufacturing index (forecast 35.0%) and March construction spending (forecast -3.7%)
If markets pay attention to any of those, it’s likely to be Tuesday’s consumer confidence index and Friday’s ISM manufacturing index. They may glance at Wednesday’s GDP figures, too. But, if recent history is any guide, they may well ignore them all.
Mortgage rates 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. All three were published in April:
Interestingly, in its April 2 forecast, the MBA predicted 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 the more optimistic numbers from Freddie on April 13 and Fannie on April 15. Indeed, Fannie’s expecting that rate to average 2.9% during the last three quarters of next year. You pays yer money …
Still, all forecasts show significantly lower rates this year than last, when that particular one averaged 3.9%, according to Freddie Mac.
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 the 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.
Last Tuesday, National Mortgage Professional magazine reported on a new federal government initiative to get past appraisal issues. Some 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.
If you’re affected, talk with your loan officer, attorney or real estate agent.
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 recent rises highlighted the limits of its power). And we think it likely it will remain so, at least 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. But it really is just a personal view.
Only you can decide
And, 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 mortgage rates 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.Verify your new rate (Jun 2nd, 2020)
What causes rates to rise and fall?
In normal times (so not now), 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.