Forecast plus what’s driving mortgage rates today

Average mortgage rates fell again last Thursday — for the sixth consecutive day. That evening, they were lower than when they set their all-time monthly low at the end of 2012. Of course, you shouldn’t confuse daily averages with monthly ones. But still, rejoice!

We know that mortgage rates bounce back from extreme lows. But might it be different this time? Possibly. The Federal Reserve is throwing unlimited funds into buying mortgage bonds (more on that below). And that should be driving those rates lower. But life’s rarely that straightforward. And you’d be brave to assume that we’ve seen the back of rises. We guess one or more may be hurtling our way, though we’ve no idea when they might hit.

Still, we remain optimistic that, overall, the Fed will prevent the most serious rises and maybe continue to push mortgage rates 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 this morning By about 9:50 a.m. (ET), the data, compared with roughly the same time last Thursday morning, were:

• Major stock indexes were 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
• Gold prices rose to $1,738 an ounce from $1,730. (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 dropped to $23.33 a barrel from $26.63 (Good 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 fell to 0.74% from 0.77%. A year ago, it was at 2.55%. (Good 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 tumbled to 37 from 43 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

We should brace ourselves for one or more rises in mortgage rates soon. But nobody knows when those will come. Because mortgage rates remain untethered from markets — and markets from reality. Still, we hope the Fed will hold the line against investors who’d like those rates to be significantly higher. And that a benign trend will emerge.

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 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 previous 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. Picture a tall pile of different closing documents tied up with string and you’re probably getting the concept of an MBS, even if the reality is often more digital. Chances are, your existing mortgage is tied up in just such a bundle and forms part of one MBS.

And, if you’re currently buying or refinancing a home, it’s the going price of these bundles on that secondary market that more than anything else 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 for investors — and lower mortgage rates for you.

Last Monday’s Financial Times reports, “The US central bank bought more than $1m of assets per second over past two weeks.” [Our emphasis.] 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 took a while to have an effect on mortgage rates. Indeed, it was only last Tuesday that they first dipped lower than they were on March 23, when unlimited purchases were announced. So how come there was a delay?

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

But its latest figures, released last Wednesday, suggest that excess demand was easing off during the week ending April 3. Even so, refinance applications were still 144% higher than they were a year earlier. And current record lows for these rates may push up applications this week

Fed may now be main player

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. Indeed, 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 even lower. But don’t expect a smooth ride.

Fly meets ointment

Now, there’s another issue rearing its head. Lenders that aren’t banks face cash flow issues arising from the pandemic. Many homeowners are already unable to make their monthly payments in full (see “They’re already struggling with mortgage and rent payments,” below).

And that problem’s likely to get only worse as unemployment and underemployment soar. Importantly, those non-bank lenders currently originate more than half of all residential mortgages. If they find themselves without the cash to lend, the supply of new mortgages could diminish.

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.

The federal government and regulators are currently exploring ways to help out nonbank mortgage lenders.

You can now understand why we said there’s a lot going on here.

More pain ahead?

Investors continue to ignore the possibility of a nasty financial hangover after the stimulus. Last Thursday, we learned from official figures that more than 16 million Americans have filed new claims for unemployment insurance within the previous three 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].

Now, legislators are already working on a new stimulus bill that could take the deficit above that range.

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

Unemployment could soar

You may have seen some scary employment numbers on social media. Those likely came from 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 nearly 17 million jobs lost in three 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.

Last Tuesday, United Nations agency the International Labor Organization revealed its worldwide employment projections for the current quarter. And it believes there will be an overall cut of 7% in working hours globally. Doesn’t sound too bad? Well, it’s the equivalent of 195 million full-time jobs.

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, digital 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) are extending their acceptance of exterior-only or “drive-by” appraisals — and even wholly 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 access to the 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 predictions are looking good. However, they’re not universally shared so you shouldn’t rely on them for future trends. On April 2, the Mortgage Bankers Association’s 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 less than eight weeks.

The virus now has a confirmed presence on five continents (none in Antarctica) and in 210 countries and territories. Overnight figures show COVID-19 has been confirmed in 1,867,554 (up from 1,536,094 last Thursday) cases around the world, and has killed 115,287 (up from last Thursday’s 89,877).

Here at home, the US has 560,433 cases, up from 435,167 last Thursday. It ranks No. 1 on a list of countries with the most infections, with more than the next three added together. And now well over one-in-four (nearer one-in-three) 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.

Worse, with 22,115 (14,797 on Thursday), we are also first for COVID-19-related deaths, although considerably lower on a per capita basis. But we’re at an earlier stage of infection than others with higher per-head 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, Germany and France, 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 many 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.

Domestic economic worries

Last Monday, JPMorgan 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.”

Also last Monday, former Federal Reserve Chair Janet Yellen told CNBC, “This is a huge, unprecedented, devastating hit.” She went on to express her opinion that US unemployment was already running at 12% or 13%.

Last Thursday, The New York Times reported:

A recent Deutsche Bank analysis looking ‘beyond the abyss’ reckons that, compared with pre-virus trend growth, the U.S. and European economies will be $2 trillion smaller by year end, and still $1 trillion smaller at the end of 2021.

The American people know

This is beginning to be more widely understood by the American people. The Pew Research Center has recently been tracking how they feel. In a poll conducted between March 19 and 24, of the respondents who gave an answer to the relevant question, 17% expected a depression, 48% a recession and 34% an economic slowdown.

Meanwhile, a new poll of Americans from the Peter G Peterson Foundation was published last Monday. In it, 73% of respondents reported that their income had already been hit, while 24% said their cut affected them “very significantly.”

They’re already struggling with mortgage and rent payments

Inevitably, the financial pain felt by many Americans is beginning to impact the housing market. A survey by Apartment List, published last Wednesday, found that one in four Americans failed to pay their housing costs in full this month. And homeowners were unable to make their full mortgage payments roughly as frequently as tenants struggled with their rents.

Twelve percent of respondents made no payment and about the same proportion made a partial one. Perhaps surprisingly, the report says that nearly 17% of households making six-figure incomes weren’t able to pay in full. 

You can see why non-bank mortgage lenders are worried about their liquidity.

But markets seem untethered from reality

We said above that markets are untethered from reality. That is, of course, a value judgment. But it’s hard to see why, for example, the S&P 500 had by the Easter weekend bounced back 25% since its low on March 23. Aren’t investors seeing the same death tolls, infection rates, unemployment rates and gross domestic product forecasts as the rest of us? Do they think company earnings won’t take severe hits?

On April 10, The New York Times offered a possible explanation: Markets see all that. But they hope the federal government’s and Federal Reserve’s mass pumping of trillions in cash into the economy will see the big companies in which they invest emerge largely unscathed.

Indeed, they perceive huge numbers of newly unemployed Americans each week as a plus. Because, politically, those force the administration and Congress to pump in yet more money.

All this depends on a very quick economic recovery. And maybe Wall Street expectations of one will be proved right. But you may wonder whether they should be betting so big on so many unknowable variables. And we’ll continue to say they’re untethered from reality.

Economic reports this week

Don’t expect any domestic economic reports published this week to have much, if any, effect on wider markets. For several weeks, these have been all but ignored by investors — even those shocking numbers of newly unemployed we’re getting used to seeing each Thursday.

You may legitimately be surprised those employment numbers are shrugged off. But it’s easy to see why many others are. In such a fast-moving environment, numbers for retail sales or industrial production (both released on Wednesday) for March are already way out of date. They’re no indicators of today’s reality.

The pandemic had a much looser grip just last month (it only feels as if we’ve been in this situation forever) so data for that period have little relevance now.

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: Nothing
• Wednesday: March retail sales (forecast -7.1%) and retail sales excluding autos (forecast -4.9%). March industrial production (forecast -4.0%) and capacity utilization (73.3%)
• Thursday: Weekly jobless claims to April 12 (forecast 5.0 million new claims for unemployment insurance). March housing starts (forecast 1.295 million new homes started) and building permits (1.270 million new residential permits issued)
• Friday: Nothing

So Wednesday and Thursday are the days to watch. Just don’t expect to see much.