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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

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.

The future

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.

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.

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. 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.

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% 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.

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

There is tension between economic data that’s being published now and what appears to be happening in the real world. Some of this can be explained by the lag between actual economic activity and the compilation and publication of the figures that report it.

So recent data measure performance during a time when many states were reopening. Back then, it was hoped that the pandemic was fading. Things appear to be different now, with some states pausing or reversing their relaxation of anti-COVID-19 restrictions. And that’s bound to have an economic impact.

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:

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

Last Wednesday, following its July meeting of the FOMC, the Fed 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.

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

Thirty million Americans are currently claiming unemployment benefits. And a Census Bureau study recently found that more than one in 10 US households reported that they didn’t have enough to eat.

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. 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.

As importantly, some economists warn that letting the federal benefit lapse risks hitting consumer spending, something that would quickly affect the wider economy. Yesterday’s Financial Times had a headline, “US economy in peril as unemployment payments expire.”

So, even leaving aside the human misery, political paralysis could prove costly for the economy. Yesterday’s talks to overcome the political deadlock were unsuccessful and will continue. But the parties’ positions remain far apart.

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: -9% yesterday. Of course, the actual numbers are still appalling, and 47,832 Americans were newly diagnosed yesterday. But that figure’s been consistently over 60,000 recently.

Sadly, deaths remain at horrific levels, though yesterday’s 602 was lower than we’ve become used to seeing. And the 14-day change for deaths is +36%. We can only hope that these will soon plateau, as new infections already are.

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.

Non-pandemic news

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

In particular, China is firmly in the US’s sights over a recent crackdown on human rights in Hong Kong. New sanctions have already been proposed and more may follow.

Things escalated a couple of weeks ago when each side closed a consulate belonging to the other in its country. 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.

Domestic threat

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.

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 Thursday’s new claims for unemployment insurance came in at 1.43 million for the previous week, an unthinkably high number at the start of the year
3. Last week’s 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
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

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.”

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. And since then their trajectory has continued upward, with only a few days of exceptions.

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 great 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.