By; Peter Warden
Forecast plus what’s driving mortgage rates today
Average mortgage rates rose yesterday. It wasn’t a big movement but it took that average back up to last Thursday’s level. You have to go back to May 19 to find a higher one.
This won’t have come as a surprise to regular readers. Uncertainty is currently baked into markets. And, while we still hope to see new all-time lows in coming weeks, nobody should expect a smooth ride.
Important notes on today’s mortgage rates
Naturally, few buying or refinancing will actually qualify for the uberlow rates you’ll see bandied around in some media and lender ads. Those are typically available only to people with stellar credit scores, big down payments and robust finances (so-called top-tier borrowers).
Still, before locking, everyone buying or refinancing stands to lose or gain when rates change.
When movements are very small, many lenders don’t bother changing their rate cards. Instead, you might find you have to pay a little more or less on closing in compensation.
Overall, we think it likely that the Federal Reserve’s going to drive rates even lower over time. However, there’s a lot going on here. And, as we’ve recently seen, the Fed can only influence some of the forces that affect mortgage rates some of the time. So nothing is assured.
And expect some rises along the way. Read “How the Fed’s helping mortgage rates,” below, to explore the essential details.
Market data affecting (or not) today’s mortgage rates
We can still see little relationship between mortgage rates today and activity in the markets they usually follow. So we’re publishing the following in the hope you have insights that we’re missing. Here’s the state of play this morning at about 9:50 a.m. (ET). The data, compared with roughly the same time yesterday morning, were:
- The yield on 10-year Treasurys rose sharply to 0.82% from 0.74%. (Bad for mortgage rates.) More than any other market, mortgage rates normally tend to follow these particular Treasury bond yields, though less so recently
- Major stock indexes were mixed. (Neutral 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
- Oil prices inched lower to $36.76 a barrel from $36.88 (Neutral for mortgage rates* because energy prices play a large role in creating inflation and also point to future economic activity.)
- Gold prices nudged up to $1,719 an ounce from $1,714. (Neutral 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 …
- CNN Business Fear & Greed index inched up to 61 from 60 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.
Time was when we could use those markets to fairly confidently predict what would happen to mortgage rates on any given day. But those rates are for now divorced from those markets — and those markets are untethered from reality.
Are things changing?
Having said that, Mortgage News Daily reckons that mortgage bonds are more closely tracking other bonds than they’ve been doing recently. And the other bonds that they traditionally shadow most closely are 10-year Treasurys.
We’re not yet ready to use the yield on those Treasurys to predict daily changes in mortgage rates. But you may decide to take your cue from them. If so, they’re the first item on the market data list, above. And they’re looking bad today.
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. (Read on for specialist economists’ forecasts.) And you can expect bad patches when they rise.
As 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 — explanation coming up). For now, there would be no limit on how much it would spend buying these.
On May 12, for example, the Federal Reserve Bank of New York purchased $240 million of mortgage bonds with a “coupon” (yield, well, sort of) of 2%, according to Bloomberg. The Fed said more buying was imminent.
We’ve been saying since then that you might see some lenders offering mortgages at sub-3% rates sooner than most expected. And, sure enough, a few already have been.
What a mortgage-backed security is
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.
How Fed affects mortgage rates
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 gigantic new buyer in this secondary market, it should generate increased demand that raises MBS prices and so creates lower yields for investors — and lower mortgage rates for you.
So that’s the theory. But we’ve seen a lot of those crumble to dust in recent months. And only time will tell how well this one holds up in practice.
Challenges to the Fed’s program
So how come 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 refinances.
Since late in March, refinances have been elevated, according to the Mortgage Bankers Association (MBA). Over many weeks, there were more than twice as many applications as during the same period a year earlier. That demand’s eased a little recently. Still, in yesterday’s figures, which cover the week ending May 29, they were still up 137% compared with that week in 2019.
So no surprises there. As you’d expect, current, 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, many are shying away from MBSs. But the law of supply and demand means that lower demand inevitably pushes up mortgage rates. (Remember that counterintuitive mathematical certainty that lower bond prices mean 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, with so many competing pressures, don’t expect a smooth ride.
Higher rates that are unconnected to MBS prices
And there’s a supply issue that’s been happening further down the mortgage production line than where the Fed is tinkering — and than where higher prices mean lower yields and rates.
Lenders who can’t cope with sudden tsunamis of demand try to manage their workloads by deterring would-be borrowers through higher rates. And, in this way, we may 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.
Mortgages tougher to get
It’s all very messy. And some lenders are offering appreciably lower rates than others.
Worse, many have been putting restrictions on their loans. So you might have found it harder to find a cash-out refinance, a loan for an investment property, a jumbo loan — or any mortgage at all if your credit score is damaged.
In its Mortgage Credit Availability Index (MCAI) for April, the MBA revealed just how much spooked lenders were tightening their credit requirements. That index fell by 12.2% that month.
More recently, there have been signs that lenders are relaxing their credit restrictions a little. It seems they think they’re getting a feel for the impact the coronavirus will have on their businesses. But it remains even more important than usual to shop around for your loan or refinance.
What economists expect for mortgage rates
On May 21, realtor.com® Chief Economist Danielle Hale predicted low mortgage rates for the foreseeable future. Of course, it’s unlikely she meant there would be a continuing straight line that only went downward. Some rises along the way are pretty much inevitable.
“We expect mortgage rates to stay low and possibly slip lower,” Hale said on realtor.com. “We’ll flirt with the 3% threshold for a while before we go below it.”
Indeed, some top-tier borrowers of 30-year, fixed-rate mortgages have already been able to find rates that begin with a 2. But those remain rare.
Of course, not all experts share Hale’s view. In their latest forecast, published on May 15, the MBA’s economists predicted that the rate for a 30-year, fixed-rate mortgage would average 3.4% for the rest of this year. OK, that’s better than they thought in April. But it’s among the less optimistic forecasts.
Fannie Mae and Freddie Mac 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% for the whole of 2021.
What should you conclude from this? That nobody’s sure about much.
Mortgage rates traditionally improve the worse the economic outlook. So where the economy is now and where it might go are relevant to rate watchers.
In the first quarter, US gross domestic product (GDP) fell by 5.0%, according to official figures, updated last week. But things are looking way worse for the current quarter (April 1-June 30). So, on June 1, the Federal Reserve Bank of Atlanta’s running GDP “nowcast” put its real GDP growth forecast for the current quarter at -52.8%.
Meanwhile, May 8’s official employment situation report showed April’s unemployment rate soaring to 14.7%, up from 3.5% in February. And, at 20.5 million, the total number of jobs lost in April was a record. In fact, it was more than twice as many in that one month than the 8.7 million that disappeared throughout the Great Recession. Numbers for May are due out tomorrow.
But, in mid-May, Goldman Sachs forecast much worse unemployment. It’s expecting a 25% rate at the peak. And on May 22, JPMorgan Chase predicted an unemployment rate of at least 10% through the first quarter of 2021.
On Monday, the Congressional Budget Office reduced its expectations of US growth over the period between 2020 and 2030. Compared with its forecast in January, the CBO now expects America to miss out on $7.9 trillion in growth over that decade.
So a recession of some sort seems inescapable. But what will it look like?
What shape will a recession take?
Economists are squabbling about the shape (if you pictured it on a graph) the recession might take.
For a while, a V-shaped one (sharp dip and sharp recovery) was favorite. And it still is for some. But other shapes are available. So some think a W more likely, especially if there’s a second wave of coronavirus infections following the early ending of lockdowns. Others fear an L: a precipitous fall and no recovery.
A “Nike swoosh” (based on that company’s famous logo) is gaining popularity. That’s a sharp drop followed by a gradual recovery.
But last Friday’s New York Times urged everyone to “Forget swooshes and Vs. The economy’s future is a question mark.” By which it meant, quit squabbling because nobody has a clue.
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 The Financial Times on April 20 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.
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 discern a reason for the S&P 500 and Dow to rise by more than 4% in May and the Nasdaq to jump by nearly 7% that month. Even more bafflingly, the S&P 500 stock index was up nearly 13% in April, its best monthly performance in 33 years. Just this morning, the Nasdaq reached a record high, wiping out all its pandemic losses.
That’s especially troubling given that, on May 1, analytics firm FactSet calculated that
Last Wednesday’s New York Times noted, “By some measures, stocks are as expensive, relative to earnings, as they were in the heady dot-com days.”
And, on May 15, The New Yorker ran a headline that posed a question many are asking:
Have the Record Number of Investors in the Stock Market Lost Their Minds?
Sly like a fox? Or not?
On April 10, The New York Times offered a possible explanation for markets’ apparent break from reality. Investors see the same death tolls, GDP forecasts, unemployment numbers and company earnings results as the rest of us.
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 could force the administration and Congress to pump in yet more money.
However, this strategy’s success depends on a very quick economic recovery (a V-shaped recession) once the COVID-19 threat dissipates. And that may not be as likely as investors seem to think. Perhaps a more telling explanation for stock market performances is that investors simply have few other profitable places to put their money.
But you may wonder whether those investors should be betting so big on so many unknowable variables. Meanwhile, we’ll continue to say they’re untethered from reality.
Economic reports this week
If stock markets pay any attention to this week’s economic reports, they’ll be breaking a recent habit. In recent months, their preference has been to magnify the smallest glimmer of good news, no matter how speculative, and to shrug off all bad news.
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.
This week’s calendar
This week’s calendar of important, domestic economic reports comprises:
- Monday: Institute for Supply Management (ISM) manufacturing index for May (actual 43.1%; forecast 44.0%). Plus April construction spending (actual -2.9%; forecast -6.8%%)
- Tuesday: Nothing. But May motor vehicle sales will emerge through the day as manufacturers release their individual figures.
- Wednesday: May ISM nonmanufacturing index (actual 45.4%; forecast 44.7%) and private-sector ADP employment report (actual -2.76 million private sector jobs; no forecast but April -20.2 million). Plus April factory orders (actual -13.0%; forecast -12.0%)
- Thursday: Weekly jobless claims to May 30 (actual 1.88 million new claims; forecast 1.81 million). Plus second reading of productivity during the first quarter of this year (actual -0.9%; forecast -2.7%)
- Friday: May official employment situation report, comprising nonfarm payrolls (forecast -7.38 million jobs), unemployment rate (forecast 19.0%) and average hourly earnings (forecast +1.3%).
The employment situation report on Friday is usually seen as one of the most important economic reports on the calendar. Will markets pay attention this time? Don’t hold your breath.
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 financial 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 (now a quarterly report, so less responsive to rapidly unfolding events) was published in April. And the MBA’s and Fannie’s were released in mid-May:
Interestingly, in its May 15 forecast, the MBA predicted higher rates for the rest of this year than either Freddie or Fannie. 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 May 13.
The gap between forecasts is real and widens the further ahead forecasters look. So Fannie’s now expecting that rate to average 2.9% throughout next year, while the MBA thinks it will be back up to 3.5% for the last half of 2021. Indeed, the MBA reckons it will average 3.7% during 2022. You pays yer money …
Still, all these forecasts show significantly lower rates this year and next than in 2019, when that particular one averaged 3.94%, according to Freddie Mac’s archives.
And never forget that last year had the fourth-lowest mortgage rates since records began. Better yet, this year may well deliver an all-time annual low.
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.
Appraisals sometimes avoidable
Many lenders are already allowing “drive-by” (exterior only) home appraisals or even wholly remote ones based on desk research.
On May 5, National Mortgage Professional magazine reported that an April 14 federal government initiative to get past some closing issues was being extended until at least June 30. The magazine listed the following bullet points:
- Alternative appraisals on purchase and rate term refinance loans
- Alternative methods for verifying employment before loan closing
- Flexibility for borrowers to provide documentation (rather than requiring an inspection) to allow renovation disbursements (draws)
- Expanding the use of power of attorney and remote online notarizations to assist with loan closings
Those directly apply only to mortgages backed by Fannie and Freddie, though individual lenders may be making similar provisions for other types of loans.
… 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 have highlighted the limits of its power). And I 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 I’m 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 record 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.
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.