Southwest Montana Real Estate Blog

Market data affecting (or not) today’s mortgage rates

From an article on The Mortgage Report

Are mortgage rates again aligning more closely with the markets they traditionally follow? It’s too soon to be sure. But, if you’re ready to take your cue from them, things are looking OK for mortgage rates today. 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 fell to 0.67% from 0.70%. (Good 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 mostly 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
• Oil prices inched up to $40.27 a barrel from $40.24 (Neutral for mortgage rates* because energy prices play a large role in creating inflation and also point to future economic activity.) 
• Gold prices nudged down to $1,792 from $1,798 an ounce. (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.
•  CNN Business Fear & Greed index yet again held steady at 53 out of a possible 100 points. (Neutral 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 matter of cents on oil ones is a fraction of 1%. So we only count meaningful differences as good or bad for mortgage rates.

Important notes on today’s mortgage rates

The rate you’ll actually get

Naturally, few buying or refinancing will actually qualify for the lowest 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). And, even then, the state in which you’re buying can affect your rate.

Still, prior to locking, everyone buying or refinancing typically stands to lose when rates rise or gain when they fall.

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.

The future

Overall, we still think it possible that the Federal Reserve’s going to drive rates even lower over time. However, there was a lot going on here, even before the green shoots of economic recovery began to emerge. There’s even more now. And, as we’ve already seen, the Fed can only influence some of the forces that affect mortgage rates some of the time. So nothing is assured.

Read “For once, the Fed DOES affect mortgage rates. Here’s why” to explore the essential details of that organization’s current, temporary role in the mortgage market.

Freddie Mac’s weekly rates

Don’t be surprised if Freddie Mac’s Thursday rate reports and ours don’t exactly coincide. To start with, the two are measuring different things: weekly and daily averages.

But also, Freddie tends to collect data on only Mondays and Tuesdays each week. And, by publication day, they’re often already out of date. So you can rely on Freddie’s accuracy over time, but not necessarily each day or week.

What economists expect for mortgage rates

Looking good … to most

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.”

And she’s already been proved right. But, of course, not all experts share Hale’s rosy view, at least over the medium term. Indeed, her own publication, Realtor.com, said recently that it thought rates could soon rise above their then-current sub-3% level.

See the table below for forecasts from Fannie Mae, Freddie Mac and the Mortgage Bankers Association (MBA).

Mortgage rates forecasts for 2020

The only function of economic forecasting is to make astrology look respectable. — John Kenneth Galbraith, Harvard economist

Galbraith made a telling point about economists’ 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 financial plans?

Fannie Mae, Freddie Mac and the MBA each has a team of economists dedicated to monitoring and forecasting what will happen to the economy, the housing sector and mortgage rates.

The numbers

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 (including Freddie’s, which is now a quarterly report) were published in mid-June.

So, suddenly, Fannie Mae’s optimism is the outlier. And nobody’s expecting a quarterly average below the 3.0% mark this year.

What should you conclude from all this? That nobody’s sure about much but that wild optimism about the direction of mortgage rates might be misplaced.

Further ahead

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 Freddie’s anticipating 3.2% during the same period. And 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.

Mortgages tougher to get

The mortgage market is currently very messy. And some lenders are offering appreciably lower rates than others. When you’re borrowing large sums, such differences can add up to several thousands of dollars over a few years.

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.

All this makes it even more important than usual that you shop widely for your mortgage and compare quotes from multiple lenders.

Still, there are signs in studies by Fannie Mae and the MBA that the screw is turning more slowly. And some forecast that a number of lenders will begin to loosen restrictions “soon.”

Economic worries

Mortgage rates traditionally improve (move lower) the worse the economic outlook. So where the economy is now and where it might go are relevant to rate watchers.

Now and later

Employment and retail sales figures (among many others) have been much better than expected over the last month or so.

But many were sobered by the Federal Reserve’s worrying forecasts for economic growth and employment on June 10. And those concerns were reinforced last Wednesday when the minutes of the last meeting of its policy committee were published. Those revealed that the Fed expected:

1. Rising business failures
2. Depressed consumer spending well into 2021
3. The real possibility of a double-dip downturn, which could undermine a recovery in employment

Yesterday, Goldman Sachs was the latest to issue warnings about the effects on the nascent recovery of pausing the relaxation of lockdown rules. “The recent declines are minor compared to the collapse in activity in March and April,” said chief economist Jan Hatzius. “But they clearly indicate a break from the steady upward trend since mid-April,” told clients.

COVID-19 still a huge threat

The New York Times this morning had better news. It reckons there has been a 78% spike in new COVID-19 cases over the two weeks ending yesterday. Yes, it’s still deeply depressing. But it’s well down on Sunday’s 84% and last Thursdays’ 87%. it may mean that the pausing or reversal of lockdown-relaxation measures in some states is paying off.

But it wasn’t all good news in this morning’s Times. It reported a rising trend in the infection rate over the past two weeks in 40 states.

The rises were small in places such as Maine, Hawaii and Colorado. But very steep in Arizona, Florida, South Carolina, Mississippi and several others. Only in New Hampshire and Washington DC were cases actually falling. Elsewhere, they were largely unchanged.

Sobering prediction

We’ve recently seen that public health researchers are no more unanimous nor much better at forecasting than economists. But Dr. Anthony Fauci told the Senate Health, Education, Labor and Pensions Committee last Tuesday:

We are now having 40-plus-thousand new cases a day. I would not be surprised if we go up to 100,000 a day if this does not turn around, and so I am very concerned.

Non-pandemic news

Although COVID-19 news dominates both generally and in markets, there’s still room for other fears. And concerns over trade are currently elevated.

Arguably, tensions between Washington DC and Beijing are currently more strained than they’ve been for several years. That won’t have been helped by the enactment by China last Monday of a potentially oppressive new security law for Hong Kong in breach of at least one international treaty.

Congress last week passed a bill containing sanctions against China — including on banks that do business with some Chinese entities. That bill may become law soon.

Meanwhile, on June 18, the US fell out with France, Britain, Italy and Spain. Those nations want to close some tax loopholes used by certain American tech companies to artificially reduce the profits they make in those countries. And that’s something the administration is resisting.

Inevitably, those disputes with China and European countries raise the possibility of a new trade war, perhaps on two fronts.

Domestic threat

Most important recent economic data have been looking good. But you need to see them in their wider context.

First, they follow disastrous lows. You expect record gains after record losses. And, secondly, the pandemic is far from over, with some states still recording frightening numbers of new cases and deaths.

So, while good news is more than welcome, it can mask the devastation wreaked on the economy by COVID-19.

Worries

Some concerns that remain valid include:

1. We’re currently officially in recession
2. Unemployment is expected to remain elevated for the foreseeable future — Last week saw the third Thursday in a row when new weekly jobless claims were actually worse than anticipated
3. On July 2, the Federal Reserve Bank of Atlanta’s GDPNow™ running resource put its real GDP growth forecast for the current quarter at -35.2% (yes, that a minus). However, it’s worth noting that the figure has dropped sharply from earlier readings
4. On June 1, 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

This morning, the Organization for Economic Cooperation and Development (OECD) forecast high unemployment globally through to the end of next year and beyond.

And, as IMF Chief Economist Gita Gopinath put it on June 24: “We are definitely not out of the woods. This is a crisis like no other and will have a recovery like no other.”

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. Indeed, they may well be preening themselves following the latest employment and retail sales reports.

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. A “Nike swoosh” (based on that company’s famous logo) is gaining popularity. That’s a sharp drop followed by a gradual recovery. Most recently, a reverse square-root symbol (√ but backward) has gained in popularity.

But on May 29, The 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.

Markets seem untethered from reality — or not?

And yet, in spite of all the above, on June 30, US stock markets celebrated the end of their best quarter since early in 1987. And there trajectory has continued upward since.

Is it any surprise that we’ve recently been accusing markets (or the investors who make them up) of being untethered from reality? Or that we’ve been quoting a May 15 headline in The New Yorker: “Have the Record Number of Investors in the Stock Market Lost Their Minds?”

On June 16, controversial, Nobel-prizewinning economist Paul Krugman wrote this for The New York Times:

What are these investors thinking? I don’t think they are thinking — not really. The conventions of financial reporting more or less require that articles about market action ascribe rationality to investors, so stock movements are attributed to optimism about economic recovery, or something. But the reality is that we’re largely talking about young men, many with a background in sports betting, who have started buying stocks and are bullish because they’ve made money so far.

On June 14, CNN Business reported that just one online brokerage, TD Ameritrade, had opened 608,000 new accounts during the first quarter of this year. That was more than double the number in the previous quarter. Some, such as Krugman, see this as a response to lockdown, with inexperienced and unknowledgeable amateur investors piling into a high-risk environment.

Foreign markets also buoyant

Does the fact that foreign markets are similarly buoyant undermine Krugman’s point? Not necessarily.

To start with, they often follow Wall Street’s lead. And, secondly, they, too, have growing numbers of amateur day traders. For example, yesterday saw China’s bench mark CSI 300 index have its best day in more than a year, with a jump of 5.6%. That took it to a five-year high.

But Financial Times China editor James Kynge noted:

The outstanding margin debt — incurred when investors borrow to buy stock — on China’s exchanges has risen to Rmb1.16tn ($164bn), the highest level since January 2016. Surging margin finance was also a hallmark of the early 2015 rally.

The 2015 rally ended in a disastrous crash. So we may not be looking at a good sign.

Economic reports this week

It’s a quiet week for economic reports. Several are for May, which in this fast-moving environment may as well be ancient history.

The June ones are usually regarded are relatively unimportant. Only Monday’s ISM (Institure for Supply Management) nonmanufacturing (services sector) index and Thursday’s weekly jobless claims would typically have the potential to attract much attention.

Forecasts matter

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: June ISM nonmanufacturing index (actual 57.1%; forecast 51.0%)
• Tuesday: May job openings (actual 5.4 million; no forecast)
• Wednesday: Nothing — Though May consumer credit figures are released later in the day
• Thursday: Weekly new jobless claims to July 4 (forecast 1.4 million new claims for unemployment insurance)
• Friday: June producer price index — final demand (forecast +0.4%)

It’ll be a surprise if any of those stir much interest in investors.

Rate lock recommendation

The basis for my suggestion

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 rises since its interventions began 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 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.

Closing help

Until recently, we’ve been providing information in this daily article about the extra help borrowers can get during the pandemic as they head toward closing.

You can still access all that information and more in a new, stand-alone article:

How to close on a mortgage during the COVID-19 pandemic

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 rates FAQ

Mortgage rate methodology

The Mortgage Reports receive 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.

Tags

• mortgage rates (8)