Forecast plus what’s driving mortgage rates today
Average mortgage rates inched lower again yesterday. So they’re as close as it’s possible to be to the fresh all-time low set on Tuesday without actually matching it. FHA loans today start at 2.25% (3.226% APR) for a 30-year, fixed-rate mortgage.
It would be no surprise if these rates were to continue to inch up and down within a narrow range until politicians cobble together a coronavirus relief package — or until there’s some decisively good or bad news over COVID-19. But it’s just possible some other news story (China?) could gain traction and create some momentum. Stronger-than-expected job numbers this morning gave markets only a brief boost.
|Conventional 30 yr Fixed||3.188||3.188||+0.44%|
|Conventional 15 yr Fixed||3.063||3.063||+0.44%|
|Conventional 5 yr ARM||5||3.514||Unchanged|
|30 year fixed FHA||2.25||3.226||Unchanged|
|15 year fixed FHA||2.25||3.191||Unchanged|
|5 year ARM FHA||2.75||3.346||Unchanged|
|30 year fixed VA||2.25||2.421||Unchanged|
|15 year fixed VA||2.25||2.571||Unchanged|
|5 year ARM VA||2.5||2.433||-0.13%|
|Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here.|
• COVID-19 mortgage updates: Mortgage lenders are changing rates and rules due to COVID-19. To see the latest on how coronavirus could impact your home loan
Market data affecting (or not) today’s mortgage rates
Are mortgage rates again aligning more closely with the markets they traditionally follow? It’s certainly an inconsistent relationship, confused by behind-the-scenes interventions by the Federal Reserve. That is currently buying mortgage bonds and so invisibly influencing rates.
But, if you still want to take your cue from markets, things are looking OK for mortgage rates today. Why? This morning’s employment data were better than expected and pepped up investors, — but only briefly.
Here’s the state of play this morning at about 9:50 a.m. (ET). The data, compared with 11 a.m. yesterday, were:
- The yield on 10-year Treasurys edged up to 0.53% from 0.51%. (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 modestly 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 decreased to $41.45 a barrel from $42.26 (Good for mortgage rates* because energy prices play a large role in creating inflation and also point to future economic activity.)
- Gold prices fell to $2,059 from $2,071 an ounce. (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.
- CNN Business Fear & Greed index edged lower to 71 from 73 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 matter of cents on oil ones is a fraction of 1%. So we only count meaningful differences as good or bad for mortgage rates.
Rate lock advice
My recommendation reflects the success so far of the Fed’s actions in keeping rates uberlow. I personally suggest:
- 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. And you might wish to lock anyway on days when rates are at or near all-time lows.
The Fed may end up pushing down rates even further over the coming weeks, though that’s far from certain. And, separately, continuing bad news about COVID-19 could have a similar effect through markets. (Read on for specialist economists’ forecasts.) But 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.
Important notes on today’s mortgage rates
Freddie Mac’s weekly rates
Don’t be surprised if Freddie’s Thursday rate reports and ours rarely 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.
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 (“top-tier borrowers,” in industry jargon). 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.
Overall, we still think it possible that the Federal Reserve’s going to drive rates even lower over time. And, last Wednesday, the organization confirmed that it planned to continue this policy for as long as proves necessary. At a news conference, Fed chair Jay Powell promised:
We are committed to using our full range of tools to support our economy in this challenging environment.
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.
Higher rates to deter demand
We may soon see a repeat of a phenomenon that occurred earlier this year. That’s when lenders’ offices are so overwhelmed by demand for mortgages and refinances that they can’t cope.
In its latest figures, for week ending July 24, the Mortgage Bankers Association calculated, “The Refinance Index decreased 0.4 percent from the previous week and was 121 percent higher than the same week one year ago.” Processing more than double the applications seen in more normal times must be a huge challenge.
To try to deter some of the excess demand, lenders may artificially inflate the rates they offer. It’s the only way they can stop their people from drowning in paperwork.
And neither markets nor the Fed can influence how this part of the pricing mechanism affects mortgage rates.
What economists expect for mortgage rates
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.
And here are their latest forecasts for the average rate for a 30-year, fixed-rate mortgage during each quarter (Q1, Q2 …) in 2020. Fannie updated its forecasts on July 14 and the MBA refreshed its the following day. Freddie’s, which is now a quarterly report, was published in mid-June.
So none of the forecasters is expecting a quarterly average below the 3.0% mark this year. Of course, that doesn’t exclude daily or weekly averages below that level during any quarter. After all, quarterly averages can include some quite sharp differences between highs and lows.
Both Fannie and the MBA were a bit more optimistic about rates in their July (monthly) forecasts. And that’s leaving Freddie’s June (quarterly) one looking stale.
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.
The gap between forecasts is real and widens the further ahead forecasters look. So Fannie’s now expecting that rate to average 2.9% through the first half of next year and then inch down to 2.8% for the second half.
Meanwhile, Freddie’s anticipating 3.2% throughout that year. And the MBA thinks it will be back up to 3.4% for the first half of 2021 and 3.5% for the second. 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 — barring shocking news. Of course, shocking news is a low bar in 2020.
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 big sums, such differences can add up to several thousands of dollars over a few years — more on larger loans and over longer periods.
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.
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.
The Fed’s thoughts
But many were sobered by the Federal Reserve’s worrying forecasts for economic growth and employment on June 10. And those concerns were reinforced on July 1 when the minutes of the last meeting of its policy committee (the Federal Open Market Committee or FOMC) were published. Those showed continuing concerns, including expectations of:
Rising business failures
Depressed consumer spending well into 2021
The real possibility of a double-dip downturn, which could undermine a recovery in employment
Last Wednesday, following its July meeting of the FOMC, the Fed stood behind its cautious forecasts. And it noted in a statement, “The path of the economy will depend significantly on the course of the virus.” And Fed chair Jay Powell reinforced that message at his follow-up news conference that day.
It’s almost as if he’s worried that too many investors aren’t taking the pandemic’s dangers and unpredictability seriously enough.
Politics a growing issue
Last Friday, a program that saw a federal unemployment benefit of $600 a week expired. And politicians are still squabbling over its replacement.
There may be sound ideological and long-term economic reasons for discontinuing the benefit. But, in the short term, that might have impacts on millions, including those who don’t directly receive it.
Most obviously, landlords may not receive their rents and have to go to the expense of evicting tenants and finding new ones, while being unable to pay their own mortgages. And lenders (those who provide credit cards, personal loans, auto loans, student loans and so on, as well as mortgages) could see defaults, repossessions and foreclosures soar across broad population groups.
As importantly, some economists warn that letting the federal benefit lapse risks hitting consumer spending, something that could quickly affect the wider economy. Monday’s Financial Times had a headline, “US economy in peril as unemployment payments expire.”
Consumers key to US economy
Think The Financial Times is exaggerating? Maybe. But the US economy relies on consumer spending for its growth.
According to the Federal Reserve Bank of St. Louis, personal consumption expenditures contributed 67.1% of total gross domestic product in the second quarter of 2020. You might think that removing the additional federal unemployment benefit is likely to hit that hard.
So, even leaving aside the human misery, political paralysis could prove costly for the economy. On Wednesday morning, investors were buoyed by speculation that a deal between the parties on Capitol Hill was getting close, according to CNBC. But that confidence proved misplaced.
Meanwhile, a small-business relief program is set to expire tomorrow.
COVID-19 still a huge threat
That pandemic is the single biggest influence on markets at the moment. And, finally, there may be a hint of good news in the figures. Since last Friday, The New York Times has been reporting that the change in the number of new infections over the previous 14 days is now negative: -16% yesterday. Of course, the actual numbers are still appalling, and 57,128 Americans were newly diagnosed yesterday. But that figure’s been consistently over 60,000 until recently.
Sadly, deaths remain at horrific levels. Yesterday the number was 1,036. And the 14-day change for deaths was +19%. We can only hope that these will soon plateau, as new infections already are. Total reported COVID-19 deaths in the US reached 160,000 for the first time in the last few hours.
But, in a White House virus briefing on July 21, President Donald Trump warned:
It will probably, unfortunately, get worse before it gets better. Something I don’t like saying about things, but that’s the way it is.
Although COVID-19 news dominates both generally and in markets, there’s still room for other fears. And concerns over trade and foreign relations with China are currently elevated.
As The Financial Times suggested on July 24:
Tensions between the world’s two superpowers have risen to their most dangerous level in decades as the coronavirus pandemic rages through the US and Beijing cracks down on Hong Kong’s autonomy.
And that was before more recent tensions arose. Those include the president playing hardball over Tik-Tok and WeChat.
Most important economic data have recently 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.
Some concerns that remain valid include:
- We’re currently officially in recession
- Unemployment is expected to remain elevated for the foreseeable future — Yesterday’s new claims for unemployment insurance came in at 1.19 million, appreciably better than the previous week’s 1.43 million. But it was the 20th consecutive week during which new claims have topped the million mark. And all these would have been unthinkably high numbers at the start of the year
- The first official estimate of gross domestic product during the second quarter showed an annualized contraction of 32.9%. When you look at the second quarter in isolation (not annualized), the fall in economic output was about 9.5% in those three months
- 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
- As International Monetary Fund (IMF) Chief Economist Gita Gopinath put it a while ago: “We are definitely not out of the woods. This is a crisis like no other and will have a recovery like no other.”
Third quarter GDP
Need cheering up after all that? The Federal Reserve Bank of Atlanta‘s GDPnow reading suggests we might see growth in the third quarter of 20.3%, according to an Aug. 5 update.
But, again, that’s an annualized rate. So it has to be compared with the 32.9% lost in the second quarter. And there’s still time for the economy to fall back if more lockdowns are needed or federal benefits remain withdrawn.
Still, we might be looking at a light at the end of this pitch-dark tunnel.
Markets seem untethered from reality
And yet, in spite of all the above, on June 30, US stock markets celebrated the end of their best quarter for more than a decade — by some measures since 1987. Various record highs have been reached since.
Many economists are warning that stock markets may be underestimating both the long-term economic impact of the pandemic and its unpredictability. And some fear that we’re currently in a bubble that can only bring more pain when it bursts. ING Chief International Economist James Knightley was quoted by CNN Business over the weekend thus:
With virus fears on the rise, jobs being lost and incomes squeezed, we feel the recovery could be much bumpier than markets seemingly do, and think we are in for some data disappointment over the next couple of months.
Economic reports this week
There are a few important economic reports this week. Today brings by far the most significant: the official, monthly, employment situation report.
But there are a couple of others that sometimes catch investors’ eyes. Those come from the Institute for Supply Management (ISM) and measure the mood of professionals in that specialism. That provides a usually reliable indication of the economic direction of the manufacturing (Monday) and services (Wednesday) sectors. The neutral point for these is 50%. The higher above that, the better.
This week’s other reports rarely move either markets or mortgage rates far.
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: July ISM manufacturing index (actual 54.2%; forecast 53.6%) and June construction spending (actual -0.7%; forecast +0.5%)
- Tuesday: Nothing
- Wednesday: July ISM nonmanufacturing (services) index (actual 58.1%; forecast 55.0%). Plus ADP employment report (actual 167,000 new private-sector jobs; no forecast)
- Thursday: Weekly new jobless claims to August 1 (actual 1.19 million new claims for unemployment insurance; forecast 1.40 million)
- Friday: July employment situation report, comprising nonfarm payrolls (actual 1.76 million jobs added; forecast 1.68 million), unemployment rate (actual 10.2%; forecast 10.6%) and average hourly earnings (actual +0.2%; forecast -0.5%)
It’s been all about employment this week.
Rate lock recommendation
The basis for my suggestion
Other than on exceptionally good days, 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.
At one time, we were 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:
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 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.