Forecast plus what’s driving mortgage rates today
Average mortgage rates fell sharply yesterday, taking them to new all-time lows. We thought there might be a drop, but not so large a one. Stock markets actually rebounded appreciably, something that would normally push those rates higher. But these are far from normal times. Many might feel that record lows + wild unpredictability = time to lock.
First thing this morning, markets remained highly volatile. Futures had earlier pointed to higher stock prices. But the Dow Jones tumbled 200 points on opening — before ricocheting to a 290 gain in less than 30 minutes. However, mortgage rates aren’t currently acting in concert with most other markets. So even rises in the yield for 10-year Treasurys, which those rates usually track most closely, may not translate into higher mortgage rates.
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| Program | Rate | APR* | Change |
|---|---|---|---|
| Conventional 30 yr Fixed | 3.5 | 3.5 | +0.06% |
| Conventional 15 yr Fixed | 3.5 | 3.5 | +0.06% |
| Conventional 5 yr ARM | 4 | 3.936 | -0.13% |
| 30 year fixed FHA | 3.5 | 4.487 | Unchanged |
| 15 year fixed FHA | 3.563 | 4.513 | +0.13% |
| 5 year ARM FHA | 3.125 | 4.217 | +0.05% |
| 30 year fixed VA | 2.938 | 3.115 | -0.19% |
| 15 year fixed VA | 3 | 3.328 | -0.06% |
| 5 year ARM VA | 3.375 | 3.51 | -0.05% |
| Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here. | |||
Amid such volatility, we have, like yesterday, little confidence that out forecasts will hold good for long. But we think mortgage rates today might move moderately lower or perhaps hold steady. But, as always, events may overtake that prediction.
Market data affecting today’s mortgage rates
First thing this morning, markets looked set to deliver mortgage rates today that are lower or unchanged. By approaching 10 a.m. (ET), the data, compared with roughly the same time yesterday morning, were:
- Major stock indexes were mostly 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 edged higher to $1,607 an ounce from $1,602. (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
- Oil prices moved higher to $47.60 a barrel from $45.80. (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 rose to 1.13% from 1.07%. A year ago, they were at 2.72%. (Bad for mortgage rates.) More than any other market, mortgage rates tend to follow these particular Treasury bond yields
- CNN Business Fear & Greed index rose to 20 from 9 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
Today might be a slightly better day for mortgage rates. But with such excitable markets, nothing’s certain.
Especially smart readers may spot that markets themselves don’t really bear out that prediction. We’re basing it on the assumption that lenders have been holding back some gains recently and that cushion needs to be eroded before the effects of markets like today’s bite. Let’s hope we’re right.
This week
Virus still big factor for mortgage rates
The Wuhan coronavirus (Covid-19, standing for Coronavirus disease 2019) was certainly behind the mayhem we saw in global markets during the last seven business days of February. The virus now has a confirmed presence on five continents and in 77 countries, up from 71 yesterday. Here at home, the US has 103 cases, up from 88 yesterday.
China, South Korea, Italy and Iran each has hot spots with infections in the thousands and seven others in the hundreds. China, Japan and Italy each ranks among the world’s top-10 economies, while South Korea occupies the No. 11 slot.
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 is the virus’s economic consequences, which are a byproduct of the medical ones.
New China economic data deeply worrying
And data suggest those economic consequences are likely to turn out to be severe. Already, several governments and central banks are forecasting reduced gross domestic product (GDP) growth for their economies. And, on Monday, the Organization for Economic Cooperation and Development (OECD) slashed its 2020 global growth forecasts to 1.5%, almost half the 2.9% it was expecting before Covid-19 took hold. It also warned that the virus could “plunge several countries into recession this year,” according to The Guardian.
As worryingly, there are signs that economists and analysts are underestimating the virus’s likely economic impacts. Last Saturday, the China’s official purchasing managers’ index (PMI), which is an important indicator of economic activity, came in at 35.7 index points for February.
But analysts polled by Reuters had expected it to be 46.0, down from 50 in January. February’s actual figure was a record low for modern China, and more granular figures within the index painted an even grimmer picture for manufacturing production and new orders.
The Fed effect
So why did stock market indexes rise yesterday? It’s because investors in those markets expect central banks, and especially the Federal Reserve, to quickly unveil interest rate cuts and perhaps other stimulus packages that will buoy those indexes.
Sure enough, last Friday, Federal Reserve Chair Jerome Powel issued a reassuring statement, saying his organization “will use our tools and act as appropriate” to protect the economy against Covid-19’s effects. And the Bank of Japan, European Central Bank and Bank of England have all issued similar reassurances in recent days. The Bank of Australia has already cut its rates.
Yesterday, The Washington Post quoted Dan Ivascyn, who is the group chief investment officer of Pimco:
The market is anticipating major responses from global central banks, including multiple rate cuts by the U.S. Federal Reserve.
But just how realistic are expectations of the efficacy of such measures? Well, that’s anyone’s guess.
But, last Thursday, Goldman Sachs announced that it expected American companies to on average experience zero earnings growth in 2020. And it calculated that the S&P 500 could fall another 7%. Does the Fed have enough left in its toolbox to even out the sorts of bumps those predictions represent?
The dangers of global connectedness
Globalization has brought much more sophisticated and diverse supply chains. So, for instance, if you want to build a car in America, you’ll likely rely on parts from several other countries. And that means you’ll be vulnerable to any disruption in those other countries.
As long ago as Feb. 4, Bloomberg noted:
China is the largest exporter of intermediate manufactured goods that can be resold between industries or used to produce other things, so its problems quickly reverberate through global supply chains. Indeed, global reliance on those products doubled to 20% from 2005 to 2015.
But it’s not just China. If global reliance on it for intermediate goods is 20%, the rest of the world accounts for 80%. Reinforcing that point, on Feb. 24, The Wall Street Journal carried the headline, “World Economy Shudders as Coronavirus Threatens Global Supply Chains.”
Covid-19 likely to spread within US
The Centers for Disease Control and Prevention (CDC) warned last Tuesday that the coronavirus would probably spread within American communities. Dr. Nancy Messonnier, director of the National Center for Immunization and Respiratory Diseases, told journalists:
It’s not so much of a question of if this will happen anymore but rather more of a question of exactly when this will happen. … We are asking the American public to prepare for the expectation that this might be bad. … Disruption to everyday life might be severe.
The following day, in a news conference, President Donald Trump provided a more upbeat take on the danger posed. “We’re very, very ready for this,” he said, adding that the risk to the US was “very low” and that he expected the outbreak to end swiftly. He announced that Vice President Mike Pence will lead the administration’s response.
Of course, those countries with sizable outbreaks are taking exceptional measures to contain the virus. But, from a purely economic standpoint, the inevitable and correct responses of governments that face sudden epidemics are negative. Travel bans, forced isolations and the closing of public spaces, schools and workplaces all cramp growth in gross domestic products. And disruption to global supply chains can be especially damaging. It’s for those reasons that markets have responded so sharply to recent news.
How scary are the health implications?
Overnight figures show Covid-19 has been confirmed in 92,298 (up from 89.843 yesterday) cases around the world, and has killed 3,130 (up from yesterday’s 3,069). Yes, those figures — assuming they’re accurate — show it to be way more infectious than others, such as SARS and MERS. But they also reveal a much lower death rate (3.4%) so far among those infected than that of either SARS (nearly 10%) or MERS (35%).
And that crude death rate calculation is almost certainly too high. Some experts are predicting a final mortality rate of between 1% and 2%. But it’s too soon to make definitive judgments.
Not like seasonal flu
In fact, typical “seasonal” influenza (just your ordinary flu that comes around each year) has a death rate in America of about 0.1% of those who contract it, though that’s likely higher in less developed countries. And you should note Covid-19’s current 3,069 death toll in that context. According to WHO, worldwide deaths from seasonal flu have averaged between 290,000 and 650,000 annually in recent years.
And, like seasonal flu, this new strain most severely affects those who are older (over 60 years) or who already have medical conditions that compromise their immune systems. Fatalities among those infected who are younger or middle-aged adults in good health are relatively rare.
But it would be premature to assume that Covid-19 is going to act in similar ways to seasonal flu. The president’s suggestion that it will fade out when spring arrives and the weather improves may well be proved correct. However, many specialist doctors don’t share his confidence and say it’s too soon to be sure. And, while the Spanish flu pandemic faded in the spring of 1918, it returned more deadly than ever that fall.
Mortgage rate volatility ahead?
In coming days and weeks, volatility will likely be driven by changing news cycles. Good news about the virus (and consequently its economic effects) should normally see mortgage rates rise while bad news typically pushes them down. But such news isn’t always reliable.
Health experts can agree neither on the likely speed of the outbreak’s spread nor the severity of its outcomes. As ominously, they can’t decide the lead time between becoming infected and showing symptoms. And they often issue contradictory statements almost simultaneously.
Meanwhile, governments are increasingly trying to craft narratives that head off panic over both the health and economic consequences of the epidemic. And not all of them are scrupulous about avoiding fake news. For example, some remain suspicious of China’s and Iran’s numbers.
So markets that bend with every passing news cycle may turn out to be “lively,” to say the least. Still, our recent warning that “mortgage rates could bounce up and down like Tigger on E” has so far turned out to be wrong: movements have been fevered but the direction has been one-way. But it’s too soon to rule out the Tigger scenario in the future.
Economic reports this week
Last week, some quite important economic reports were effectively ignored by markets as the coronavirus monopolized their attention. We’ll have to wait to see whether the same fate awaits this week’s publications.
The most important of those is the official, monthly employment situation report, which comes out on Friday. But earlier in the week, we’ll also see indexes from the Institute of Supply Management (ISM) for the manufacturing (Monday) and nonmanufacturing (Wednesday) sectors. And in more normal times, investors might pay attention to fourth-quarter productivity (Thursday) and the trade deficit (Friday).
Of course, 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.
Forecasts matter
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 economic reports comprises:
- Monday: ISM manufacturing index (actual 50.1%; forecast 50.5%) for February, and January’s construction spending (actual +1.8%%; forecast +0.9%)
- Tuesday: Nothing. But motor vehicle sales for February will emerge during the day (forecast 16.8 million vehicles)
- Wednesday: February ISM nonmanufacturing index (forecast 54.8%) and ADP employment report (no forecast but 291,000 new private-sector jobs in January)
- Thursday: Quarter 4 of 2019 productivity (forecast +1.3%) and unit labor costs (forecast +1.3%) Plus January factory orders (forecast -0.2%)
- Friday: February employment situation report, including nonfarm payrolls (forecast 170,000 new jobs), unemployment rate (forecast 3.5%) and average hourly earnings (forecast +0.3%). Plus January’s trade deficit (forecast -$46.9 billion)
We’ll have to wait to see whether any of these reports are sufficiently great or awful to cut through markets’ viral obsession.
Today’s drivers of change
What 2020 might hold
The year 2019 ended with most stock indexes at exceptional or record highs. And investors had one of the best 12 months in living memory. So will 2020 bring more of the same? Well, Covid-19 has already eaten up this year’s gains in most markets — and, for some indexes, much or all of the last year’s.
But, even absent the virus, few thought the good times would continue for long. Still, in January, most economists, analysts and observers seemed to believe we were looking at an OK year.
Certainly, fewer were expecting a US recession during 2020 than was the case a few months earlier. When Reuters polled 100 economists in January, about 20-25% thought one was coming this year and around 30-35% expected one within the next two years. And February’s poll “found the overall U.S. economic growth outlook for this year unchanged compared with last month.”
But that’s not great news. Because January’s survey saw a consensus expectation that the US economy would “coast” this year, “with annualized growth expected to have barely moved from the latest reported rate of 2.1%” through to the second quarter of 2021.
The Federal Reserve’s role
And several financial reviews of 2019 warned that stock market rises have largely been fueled by the Federal Reserve’s actions rather than underlying economic strength, though others dispute that.
The suggestion is that some investors see stocks as a one-way bet. If anything goes wrong (virus, economic slowdown … whatever), the Fed will ride to the rescue with lower interest rates and limitless stimulus packages. Indeed, last Friday, Federal Reserve Chair Jerome H. Powell issued a statement that his organization would “act as appropriate to support the economy.”
This theory about stock market investors banking on the Fed to rescue them would certainly explain why major indexes were regularly hitting record highs amid so-so economic data and corporate results. On Feb. 16, CNN Business quoted Bleakley Advisory Group chief investment officer Peter Boockvar:
I think the stock market is just under this belief that no matter what comes our way the Fed is going to save us. I honestly believe it’s as simplistic as that.
Still, Fed-driven market growth later this year may be more modest than in 2019.
Don’t take forecasts too seriously
Just don’t take such forecasts too seriously. 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.
Real-world forecasts also gloomy
On Jan. 20, global accountancy firm PwC unveiled its 23rd annual survey, which this year polled almost 1,600 chief executive officers (CEOs) from 83 countries. Again, that was before Covid-19 became the threat we now perceive it to be. But a whopping 53% of respondents predicted a decline in global GDP growth in 2020. That was up from 29% in 2019 and 5% in 2018.
Who was most pessimistic? Those from North America, where 63% of CEOs expected lower global growth. And only 36% of American CEOs were positive about their own companies’ prospects for the year ahead. Again, that was many fewer than in 2019. Chair of the PwC network Bob Moritz issued a statement:
Given the lingering uncertainty over trade tensions, geopolitical issues and the lack of agreement on how to deal with climate change, the drop in confidence in economic growth is not surprising — even if the scale of the change in mood is. These challenges facing the global economy are not new — however the scale of them and the speed at which some of them are escalating is new.
Lower mortgage rates ahead?
Around New Year, it wasn’t hard to find experts who were predicting that mortgage rates could plumb new depths in 2020. And it looks as if they’re being proved right.
However, few of them predicted that a viral epidemic would be the cause of plunging rates. So their kudos is limited.
And we’re yet to see how Covid-19 will play out. What we do know is that mortgage rates are no longer tracking yields on 10-year Treasurys as closely they usually do. And that means the volatility in wider markets is muted for those rates.
And don’t forget John Kenneth Galbraith’s observation.
Rate forecasts for 2020
It may be a mistake to rely on experts’ 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 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. Fannie’s and the MBA’s were published in February, but Freddie’s latest forecast came out in December:
| Forecaster | Q1 | Q2 | Q3 | Q4 |
| Fannie Mae | 3.5% | 3.4% | 3.4% | 3.4% |
| Freddie Mac | 3.8% | 3.8% | 3.8% | 3.8% |
| MBA | 3.6% | 3.7% | 3.7% | 3.7% |
Freddie Mac reckons that particular mortgage rate averaged 3.9% during 2019. So, if any of those experts’ forecasts turn out to be right, it could be another good year for new mortgage borrowers — and for existing ones who want to refinance.
Negative mortgage rates
Just don’t expect zero or negative mortgage rates in America anytime soon. Still, they’re not unthinkable later this year or next, especially if the effects of Covid-19 force the Fed to make its rates negative. But we’ve a long way to go before that becomes a realistic prospect.
Already, Denmark’s Jyske Bank is offering its local customers a mortgage with a nominal interest rate of -0.5%. Yes, that’s 0.5%. However, after fees, that’s likely to be closer to a free or incredibly cheap mortgage than one that actually pays borrowers.
But don’t think there isn’t a wider price to pay for ultralow mortgage rates. On Dec. 18, The New York Times reported that, in much of Europe, these are “driving a property boom that is pricing many residents out of big cities and causing concern among policymakers.” And many fear a bubble that could end badly.
Trade
For now, trade may be on the back burner for markets. That’s because, on January 15, President Donald Trump signed a phase-one trade agreement with China’s Vice-Premier Liu He.
Although the White House remains proud of that deal, critics are less sure. They point to weaknesses that can’t be resolved until a phase-two deal. And one of those is unlikely until 2021.
Limited economic boost
Following its January poll of economists, Reuters chose to quote Janwillem Acket, who’s chief economist at Julius Baer, as representative of wider opinions:
The recent Phase 1 deal between the U.S. and China suggests decreasing odds of an escalation to a full-blown trade war. However, the deal so far is not comprehensive enough to significantly boost economic momentum.
Pain
However, perhaps the phase-one deal’s biggest drawback is that it leaves so many tariffs still in place. According to an analysis, published on the day of the signing, by the Peterson Institute for International Economics:
Even with the phase one deal in effect, Trump will have increased the average US tariff on imports from China to 19.3% from 3.0% in January 2018. The deal means the average US tariff will be reduced only slightly from its current level of 21.0%.
And this dispute has been causing some pain to both sides. China’s slipped to third place from first in the Census Bureau’s list of America’s trading partners. And its economy is certainly under strain. Indeed, on Jan. 17, China reported its slowest annual GDP growth in 29 years — though that was still +6.1% in 2019. And all that was before the coronavirus hit.
But the dispute’s impact here has also been painful for many.
Higher prices for American families
A September study by the nonpartisan National Foundation for American Policy estimated, “the tariffs will cost the average household $2,031 per year, and will be recurring so long as the tariffs stay in effect.”
Now, the White House would undoubtedly challenge that figure, as do some more independent analyses. Some believe that American businesses are bearing much of the cost and are yet to pass that on to consumers. And prices may rise significantly only when stocks of goods that arrived before tariffs were introduced are exhausted. Many importers increased their orders earlier last year to get in ahead of tariff implementation dates.
But, on Dec. 2, New York Federal Reserve Bank researchers published a report that showed that American businesses and consumers were indeed bearing the brunt of the tariffs. They found Chinese import prices fell by only 2% between June 2018 and September 2019. And that means Americans were picking up the rest of the tab on tariffs as high as 25%. It’s the timing of the pain and how it’s distributed that’s disputed.
Of course, both those studies were conducted before the new phase-one deal was announced. Now that’s signed, you can shave perhaps 11% off additional tariff costs, according to calculations by Yahoo! Finance.
European Union next?
The president occasionally makes bellicose remarks about what he perceives to be an unfair trade imbalance between the US and the European Union. The EU is the world’s biggest trading bloc. Together, its member states form a larger economy than China or even America.
The administration has already in 2019 imposed tariffs on nearly $10 billion worth of imports from the EU, including $2.4 billion on French luxury goods in December. However, a couple of glimmers of light emerged during the World Economic Forum in Davos (Jan 21-24), which was attended by the president and other world leaders.
During the week of the forum, French officials suggested that a temporary trade truce had been agreed to allow for further talks. And, on Jan 22, hopes for a new US-EU trade agreement grew. That week, The Financial Times ran a headline, “Trump and EU promise to press on to reach trade deal.”
How trade disputes hurt
All this has been fueling uncertainty in markets. And that, in turn, created volatility. Many of the recent (pre-virus) wild swings in mortgage rates, bond yields, stock markets, and gold and oil prices have been down to hopes and fears over trade.
Markets generally hate trade disputes because they introduce uncertainty, dampen trade, slow global growth and are disruptive to established supply chains. President Trump is confident that analysis is wrong and that America will come out a winner.
Rate lock recommendation
We suggest
We suggest that you lock if you’re less than 30 days from closing. Yes, you’d have made losses if you’d taken that advice in recent weeks. But we’re looking at a risk assessment here.
And there might easily be a very sharp bounce if and when Covid-19’s risks are perceived to fade, or when markets decide they’ve more than priced in the danger it poses. Indeed, some loan officers are expecting one soon and are urging clients to lock in line with our advice.
However, none of this means we expect you to lock on days when mortgage rates are actively falling. That advice is intended for more normal times.
Only you can decide
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. Continue to watch key markets and news cycles closely. In particular, look out for stories that might affect the performance of the American economy, most especially those that concern the coronavirus. As a very general rule, good news tends to push mortgage rates up, while bad drags them down.
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 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, and keep an eye on markets.
My advice
Bearing in mind professor Galbraith’s warning, 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.
What causes rates to rise and fall?
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.
