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Rate lock advice

My recommendation reflects the success so far of the Fed’s actions in keeping rates uberlow combined with relatively benign markets. 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

That FHFA debacle

This is the story behind last Thursday and Friday’s sharp increases in mortgage rates. If you’re planning to refinance to a loan backed by Fannie Mae or Freddie Mac, you may have to pay more for the privilege. Because the Federal Housing Finance Agency, which regulates the two enterprises, has just imposed a new, additional closing cost.

Unless your loan closes before the end of this month, the FHFA will make you pay an additional 0.5% of the loan amount, supposedly to cover additional market risk. For a $200,000 loan, that’s $1,000 added to your closing costs (divide your loan amount by 200).

However, if you’ve already locked in your refinance, it may be the lender who picks up the tab. But mortgage companies often operate on wafer-thin margins. So they’ve passed on the cost — through higher mortgage rates — to new applicants (and those who are yet to lock) for all types of mortgages. Hence the higher mortgage rates all round on the last two days of the last working week.

The industry is up in arms. And, on Aug. 13, some 20 bodies signed a joint statement condemning the FHFA’s move. Signatories ranged from the American Bankers Association to the Center for Responsible Lending and from the Mortgage Bankers Association to the National Fair Housing Alliance. If the federal agency caves, we could see rates fall sharply again. But you might not want to hold your breath.

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, following the last meeting of its policy committee, the organization confirmed that it planned to maintain this strategy 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 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.

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 Monday and the MBA refreshed its on July 15. Freddie’s, which is now a quarterly report, was published in mid-June.

Monday’s update from Fannie included the prediction of a 2.9% average rate for the fourth quarter of this year. That was the first time we’ve seen a forecast from any of these organizations for a sub-3.0% rate during 2020.

Of course, none of these quarterly forecasts excludes daily or weekly averages below the levels they suggest during any quarter. After all, quarterly averages can include some quite sharp differences between highs and lows.

Fannie was a bit more optimistic about rates in its August forecast, as was the MBA in its July one. 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 2.8% during the first quarter of next year and then inch down to 2.7% 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.

Yesterday’s release of the minutes of the July meeting of the Fed’s top policy committee (the Federal Open Market Committee or FOMC) made sobering reading. In particular, they contained concerns about the:

1. Uncertainty and long-term economic risks created by the pandemic
2. Expiration of additional federal benefits under the Cares Act “against the backdrop of a still-weak labor market”
3. Slowing of the initial recovery as earlier in the summer the coronavirus moved into previously unaffected parts of the country
4. Possibility of banks and other lenders soon tightening their lending criteria in ways that could “restrain the availability of credit to households and businesses”

Perhaps most worryingly, the minutes also said:

The projected rate of recovery in real GDP, and the pace of declines in the unemployment rate, over the second half of this year were expected to be somewhat less robust than in the previous forecast.

So the FOMC painted an unhappy picture. But it’s not the first time it’s done so. And markets seem adept at ignoring it — as long as it promises to keep shoveling money into the economy. It repeated just that promise in those minutes.

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, most recently on Tuesday. That was when the S&P 500 hit an all-time high, bringing to an end the shortest bear market in history.

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.

Over the weekend, CNN Business quoted two analysts with such fears. First up was FactSet analyst Marc Evans, who reported on the S&P 500 index:

• Profits for the companies that make up that index plummeted nearly 34% in the second quarter. That was the worst drop in five years
• Sales for those companies declined almost 9% That was the worst drop in nearly four years.
• Evans now expects earnings for these companies to drop nearly 19% in 2020, way worse than the 1.2% anticipated in March

The second analyst in the CNN report was Barry Bannister, head of institutional equity strategy at Stifel. He thinks the S&P 500 could currently be overvalued by as much as 10%. And, CNN Business said:

Bannister worries that investors are underestimating the risk of another surge in coronavirus cases leading to more damage to the job market and earnings growth later this year. He also believes 2021 earnings estimates are too high and will need to be revised downward.

Economic reports this week

After some eventful weeks, we’re due a quiet period. And here it is.

Indeed, the report most likely to move markets is Thursday’s weekly jobless figures, which used to be such an also-ran that we usedn’t to report them.

However, Wednesday sees publication of the minutes of the last meeting of the Federal Open Market Committee (FOMC). That’s the Federal Reserve policy committee that sets rates. And investors always pore over these minutes, hoping to divine something more than was said in the report that immediately followed the actual meeting and the subsequent news conference.

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.

This week’s calendar

This week’s calendar of important, domestic economic reports comprises:

• Monday: Nothing
• Tuesday: July housing starts (actual 1.496 million*; forecast 1.252 million) and building permits (actual 1.495 million*; forecast 1.333 million)
• Wednesday: No reports. But the FOMC minutes are published at 2 p.m. (ET)
• Thursday: Weekly new jobless claims to August 15 (actual 1,106,000 new claims for unemployment insurance; forecast 910,000)
• Friday: July existing home sales (forecast 5.5 million*)

*These figures are seasonally adjusted annual rates (SAARs)