Forecast plus what’s driving mortgage rates today

Average mortgage rates fell again last Friday. It wasn’t as big a drop as the previous day’s. And those two together weren’t enough to cancel out rises earlier in the week. So this week begins in a slightly worse position than last week did. But, looking back over the last four weeks, they’re comfortably below the average for that period.

All this suggests the Federal Reserve’s interventions in the mortgage-bond market are working. They’re stopping the sharp rises that would likely be occurring if investors alone were setting mortgage rates. And, over time, they may well bring those rates lower, though that’s not assured. If you’d like more details, read on.

Predicting what will happen to mortgage rates today remains impossible — and will do so until they get back into alignment with other markets. But we remain optimistic that the Fed will prevent the most serious rises and maybe push them lower in coming days and weeks.

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

We still see no reason to think markets are currently providing many clues as to what may happen to mortgage rates today. But, in the hope you have insights that we’re missing, here’s the state of play. By approaching 10 a.m. (ET), the data, compared with roughly the same time last Friday morning, were:

• Major stock indexes were appreciably higher. (Bad for mortgage rates.) When investors are buying shares they’re often selling bonds, which pushes prices of Treasurys down and increases yields and mortgage rates. The opposite happens when indexes are lower
• Gold prices increased to $1,680 an ounce from $1,638. (Good 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 rose to $27.34 a barrel from $26.74 (Bad 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 pushed higher to 0.65% from 0.59%. A year ago, it was at 2.52%. (Bad for mortgage rates.) More than any other market, mortgage rates normally tend to follow these particular Treasury bond yields, though less so recently
•  CNN Business Fear & Greed index moved up to 27 from 24 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

Another good day for mortgage rates is likely soon. But it may not be today. Still, nobody knows for sure because mortgage rates remain untethered from markets and markets from reality. But, if does turn out to be a good one for those rates, it will be because the Fed holds the line against investors who’d like them to be higher.

Rate lock advice

Based on today’s mortgage rates and market movements, I personally recommend:

• LOCK if closing in 7 days
• LOCK if closing in 15 days
• LOCK if closing in 30 days
• FLOAT if closing in 45 days
• FLOAT if closing in 60 days

But it’s entirely your decision.

The Fed might end up pushing down rates over the coming weeks, though that’s far from certain. And you can expect plenty of bad days.

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.

This week

How the Fed’s helping mortgage rates

In an announcement on March 23, the Federal Reserve said it was lifting the 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. Chances are, your existing mortgage is tied up in just such a bundle and forms part of an MBS. And it’s the going price of these securities on that secondary market rather than anything else that determines your next mortgage rate.

For reasons explained near the end of this article, the higher the price of MBSs, the lower the rate you’ll pay. Given that the Fed is a uniquely huge new buyer in that market, it should generate increased demand that raises MBS prices and so creates lower yields and mortgage rates.

This morning’s Financial Times reports, “The US central bank bought more than $1m of assets per second over past two weeks.” While MBSs are only a part of those purchases, the Fed’s clearly not holding back.

So that’s the theory. But we’ve seen a lot of those crumble to dust in recent weeks. And only time will tell how well this one holds up in practice.

Challenges to the Fed’s program

That Fed program has so far had only a limited effect on mortgage rates. Indeed, last Friday, they were higher than they were on March 23, when unlimited purchases were announced. So how come they’re not much lower?

Well, there’s a lot going on here. But a big reason may be a resurgence in new applications for mortgages and especially refinances. During the seven days ending March 27, those refinances jumped 26% compared with the previous week, and were up 168% on the same period in 2019, according to the Mortgage Bankers Association.

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. Some investors make losses on especially fast refinancings.

So the last thing they want is to replace lost mortgages with ones at an even lower rate. And, understandably, they shy away from MBSs. But supply and demand mean that inevitably pushes up mortgage rates.

So the Fed is trying to resist the market forces that arise when investors vote so decisively with their feet. We still think it likely (though far from certain) that it will get its way in the end and push mortgage rates somewhat lower. But don’t expect a smooth ride.

Fly meets ointment

Last Thursday, National Mortgage Professional magazine led with this:

Moody’s has announced that it has changed its outlook on the non-bank mortgage sector from “Stable” to “Negative,” as liquidity issues continue to cause concern amid the COVID-19 pandemic. Non-bank mortgage companies currently originate and service more than half of all residential mortgages in the U.S.

In other words, many of the companies that originate mortgages but that aren’t actual banks are having cash flow problems arising from COVID-19. Ratings agency Moody’s expects them to get over those in a year or so. But, in the meantime, that could cause supply issues in the residential mortgage market.

And, of course, a reduced supply of any product tends to push prices (or rates in this case) upward. This happens further down the mortgage production line than where the Fed is tinkering. So we may 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.

New stimulus package

On March 27, President Donald Trump signed into law H.R. 748, The Coronavirus Aid, Relief and Economic Security Act (CARES Act), a $2.2-trillion stimulus package.

After recent rises in response to that package, it may feel as if stock markets have largely recovered from their earlier coronavirus falls. But the reality is quite different. Last Tuesday marked the end of this year’s first quarter. And Wall Street indexes were down on average 20% over that period. Since then, they’ve been up and down.

More pain ahead?

Perhaps investors are recognizing the possibility of a nasty financial hangover after the stimulus. Last Thursday, we learned that very nearly 10 million Americans had claimed for unemployment insurance within the previous two weeks. And on March 25, The New York Times quoted analysts at the Eurasia Group:

The U.S. is likely on pace for an annual deficit of at least $4 trillion and likely higher, in the range of 15-20 percent of G.D.P. [gross domestic product].

But, also on March 25, the same newspaper noted, “With the $2 trillion economic stimulus just signed into law on Friday, Washington is already considering a fourth response package to combat the spread of the coronavirus and bolster a shuddering economy.” That now seems close to inevitable.

Some economists subscribe to modern monetary theory (MMT), which says we shouldn’t be too bothered by large national debts and deficits. But many still will be.

Unemployment could soar

Social media have recently started sharing widely some scary employment numbers contained in a blog published by the Federal Reserve Bank of St. Louis on March 24. It predicted 47.05 million Americans could be laid off during the second quarter (April through June) of this year, bringing the unemployment rate to 32.1%.

To be fair, the author stressed that this was just one possible outcome based on a model containing several assumptions. And even he referred to them as “back-of-the-envelope estimates.”

But we’ve already seen 10 million jobs lost in two weeks, So that projection may not be as fanciful as it appeared when it was first published. And if COVID-19 gets that sort of grip on the American economy (and presumably something similar globally), we could be looking at a transformed world.

Closing help …

Closing on a real estate transaction is hard enough without the extra obstacles erected by social distancing and lockdowns. So some are trying to dismantle the biggest barriers.

Legislators are currently working on a law that could further facilitate remote, electronic 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.

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.

Meanwhile, those wanting Fannie, Freddie, FHA and VA loans may find laxer appraisal procedures. All those organizations (and maybe others soon) are extending their acceptance of exterior-only or “drive-by” appraisals and even remote ones based on desktop research of the home and local property market.

… But a big issue for closings

But another obstacle may prove more difficult to surmount. Many county recording offices have been closed.

And, without the access to title searches and deed filings those provide, some purchases and refinancings may stall. The industry is working to overcome this obstacle. But its response is patchy, as legal website JD Supra reports:

Title insurance companies have issued underwriting bulletins confirming they will provide title insurance coverage for transactions that occur when recording offices will not accept documents for recording. Each title company has its own requirements and limitations, so it is important to confirm those requirements on a closing-by-closing basis.

An economist writes …

On March 16, realtor.com Chief Economist Danielle Hale thought lower rates were coming. “That [Fed buying of MBSs] should stabilize rates and bring them back down lower,” she said on her employer’s website. “They’ll [likely] go back to the low 3% [range]. Might we see rates below 3%? I wouldn’t rule it out.”

Those aren’t unreasonable predictions. However, they’re not universally shared so you shouldn’t rely on them. Last week, the Mortgage Bankers Association’s team of economists forecast that the rate for a 30-year, fixed-rate mortgage would average 3.6% between now and the start of October — a higher rate than they were forecasting in March.

Virus still the biggest factor for mortgage rates

COVID-19 stands for Coronavirus disease 2019 and refers to the disease. SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2) is the name of the virus itself. But, whatever you call it, it’s certainly been behind the chaos seen in global markets since Feb. 20. Gosh, a lot can happen in six weeks or so.

The virus now has a confirmed presence on five continents (none in Antarctica) and in 208 countries and territories. Overnight figures show COVID-19 has been confirmed in 1,288,080 (up from 1,039,158 last Friday) cases around the world, and has killed 70,567 (up from last Friday’s 55,163).

Here at home, the US has 336,906 cases, up from 245,442 last Friday. It ranks No. 1 on a list of countries with the most infections. And now more than one-in-four of those who have or have had the disease live in America, in spite of our being home to fewer than one-in-20 of the global population.

And, with 9,624, we are third for COVID-19-related deaths, although considerably lower on a per capita basis. But we’re at an earlier stage of infection than those with higher numbers. So the prospects are grim.

COVID-19 hitting biggest economies hard

Of the world’s top-10 economies, eight now count their infections in the tens of thousands or, in the case of America, Italy and Germany (Spain has the 13th biggest GDP), more than 100,000. The other two have infections in the thousands.

With the exception of Iran and Turkey, the worst-hit nations are major economies. That’s probably because those are so interconnected and so many people routinely move between them for business or pleasure.

But an even bigger human tragedy may emerge later in less developed countries, many of which lack medical resources and expertise while having some densely packed slums in which isolation and social distancing are next to impossible.

While markets are made up of people who share the fear and empathy of the rest of humanity, their focus isn’t directly on COVID-19’s health implications. Their concern when trading is the virus’s economic consequences, which are a byproduct of the medical ones.

Worldwide worries

This morning, JP Morgan CEO Jamie Dimon published his latest letter to shareholders. These pronouncements are taken seriously on Wall Street, where they’re effectively required reading.

Mr. Dimon wrote that he expected COVID-19 to bring a “bad recession.” And he went on to predict that would be “combined with some kind of financial stress similar to the global financial crisis of 2008.”

This is beginning to be more widely understood by the American people. The Pew Research Center has recently been tracking how they feel. When polled during March 10-16, 70% perceived COVID-19 as a threat to the American economy and 34% saw it as a threat to their own finances. But when asked again between March 19 and 24, those numbers had risen to 88% and 49% respectively.

And, among respondents who gave an answer, 17% expected a depression, 48% a recession and 34% an economic slowdown.

Central banks face problems

Traditionally, central banks intervene during troubled times to prop up their economies. And they mostly have in response to COVID-19. But markets have often reacted badly to those interventions.

And, with much of their armory already depleted, some are wondering how much more they can do. “Whatever it takes” is a better slogan than plan.

However, toward the end of March, Federal Reserve Chair Jay Powell took to the airwaves to assure investors that his organization will “never run out of ammunition.” And that statistic mentioned above, that the Fed’s been buying assets at a rate of $1 million a second, suggests he’s prepared to put his money where his mouth is.

Economic reports this week

Domestic economic reports continue to struggle to cut through the COVID-19 gloom. True, you might be justifiably surprised that markets seemed to shrug off the grotesquely high number of claims for unemployment insurance seen each Thursday over the last two weeks (10 million over 14 days).

But you can see why they ignore most other figures. Who cares what happened to job openings in February (out Tuesday) when everyone knows that the employment landscape today has been unrecognizably transformed since then?

So don’t expect more than one report this week to spark the smallest interest among investors. And that’s Thursday’s consumer sentiment index. That’s an April reading of how Americans are feeling, so it’s as current as possible and relevant to future markets. But even that will likely have an effect only if its numbers deliver a big surprise.

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.

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: February job openings (no forecast; 7.0 million in January)
• Wednesday: FOMC minutes*
• Thursday: weekly jobless claims (forecast 6.0 million), April consumer sentiment index (forecast 70.0 index points) and March producer price index (forecast -0.4%)
• Friday: March consumer price index (forecast -0.4%) and core CPI** (forecast +0.1%)

* FOMC is the Federal Open Market Committee. It’s the Federal Reserve body that determines that organization’s interest rates. So investors usually study the minutes of each meeting closely. But we don’t know what to expect this time round: there was no meeting but presumably a conference call before an emergency rate cut.