Forecast plus what’s driving mortgage rates today

Average mortgage rates edged up yesterday. The increase was barely perceptible and left those rates near recent lows. But it was a reminder that the direction of travel for these rates is not one way.

Not that anyone should be under that illusion. There have been more rises than falls over the last 10 days. But the Federal Reserve’s interventions in the mortgage bond market (see below for more on this) have so far meant the decreases have outweighed the increases.

And, for now, little’s changed. So we remain optimistic that, overall, the Federal Reserve will prevent the most serious rises and may perhaps push mortgage rates even lower in coming days and weeks.

However, there’s a lot going on here. And the Fed can only influence some of the forces that affect mortgage rates. So nothing is assured. Read “This week,” below, to discover the essential details.

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 yesterday morning, were:

• Major stock indexes were moderately higher. (Bad 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 fell to $1,723 an ounce from $1,732. (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. But if they’re not worried now …
• Oil prices nudged up to $12.41 a barrel from $12.27 (Neutral 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 held steady at 0.63%. A year ago, it was at 2.51%. (Neutral for mortgage rates.) More than any other market, mortgage rates normally tend to follow these particular Treasury bond yields, though much less so recently
•  CNN Business Fear & Greed index rose to 45 from 42 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

Right now, daily rates are effectively unpredictable. Because they 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 trend that’s benign will eventually emerge, punctuated with rises that aren’t too frequent, too sustained or too sharp.

Rate lock advice

I changed my recommendation recently to reflect the success so far of the Fed’s actions. I personally recommend:

• 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.

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

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. However, as you’re about to discover, it’s not the only determinant.

For reasons explained near the end of this article, it’s a mathematical certainty that 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.

Fed’s been buying $1 million in assets

On April 5, The Financial Times reported, “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. And there’s little reason to think it’s scaling back its activities yet.

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 on April 6 that they first dipped lower than they were on March 23, when unlimited purchases were announced. So how come there was a delay? And why do we still see some rises?

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.

Since late in March, refinances have been elevated, according to the Mortgage Bankers Association (MBA). So, last week, the number of new applications for refinancings was 192% higher than the same week one year ago. And last Wednesday’s MBA data, for the week ending April 17, showed them 225% up on the same period in 2019.

So no surprises there. As you’d expect, current, record or near-record lows for these rates are tempting more homeowners to refinance. But there’s one problem …

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 actual losses on especially fast refinancings.

So the last thing they want is to replace lost mortgages with ones at an even lower rate and yield. And, understandably, they’re shying away from MBSs. But the law of supply and demand means that lower demand inevitably pushes up mortgage rates. (Remember that counterintuitive point about lower bond prices meaning higher yields and 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 stabilize the market, perhaps pushing mortgage rates even lower in the process. 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. Millions of homeowners are already unable to make their monthly mortgage payments in full.

“As of April 23, 2020, more than 3.4 million homeowners — or 6.4% of all mortgages — have entered into COVID-19 mortgage forbearance plans,” according to a news release issued last Friday by Black Knight.

And that means some loans that are in lenders’ “warehouses” (that are waiting to be sold) are already turning bad before they even reach the secondary market as delinquencies and defaults become more common.

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 with warehouses overflowing with unsellable MBSs, that could leave them without the cash to lend. And that would see the supply of new mortgages diminish.

Possible removal of fly

But, last Tuesday, the Federal Housing Finance Agency (FHFA) announced that it was capping lenders’ (or, more accurately, servicers’) liability for forbearance issues to four months of payments. Still, Black Knight reckons that will still leave them with revenues reduced by more than $7 billion.

We’ll have to wait to see if that FHFA cap takes off the pressure. You’d think limiting liability would at least make it easier for mortgage companies to borrow to cover their shortfalls. If things work out that way, it should restore the supply of mortgages.

Meanwhile, the FHFA last Wednesday said that Fannie Mae and Freddie Mac could buy loans that are in forbearance. But insiders are outraged by the deals on offer, according to Inside Mortgage Finance magazine. Because those include “steep loan-level price adjustments,” which mean worse returns for mortgage companies.

Higher rates that are unconnected to MBS prices

Meanwhile, of course, while we’re waiting to see how the FHFA’s initiatives play out, a reduced supply of any product tends to push prices (or rates in this case) upward. This supply issue happens further down the mortgage production line than where the Fed is tinkering — and than where higher prices mean lower yields and rates.

And a similar thing happens when lenders who can’t cope with sudden tsunamis of demand try to manage their workloads. They deter would-be borrowers through higher rates. So we may sometimes see (or have already seen) higher rates that are unconnected with MBS prices.

It’s all very messy. And some lenders are offering appreciably lower rates than others while many are putting restrictions on their loans. So you may find it harder to find a cash-out refinance, a loan for an investment property or any mortgage at all if your credit score’s iffy. Shopping around is even more important than usual.

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

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 still looking sensible. However, they’re not universally shared. So you shouldn’t totally rely on them for future trends.

For example, 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.

But, having said that, Fannie Mae and Freddie Mac unveiled their rates forecasts in mid-April (details below). And they both expect them to head lower, more in line with Danielle Hale’s prediction. Indeed, Fannie’s expecting that rate to dip to 2.9% in 2021.

What should you conclude from this? That nobody’s sure about much.

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 10 weeks.

COVID-19 hitting biggest economies hardest

Of the world’s top-10 economies, five (America, Italy, France, Germany and the UK) now count their infections in the hundreds of thousands — except the US, which has just broken through the 1 million mark. All the other five count them in the tens of thousands.

Of course, no country has sufficient testing to accurately record its actual infection and death rates. But some may also be manipulating them for political purposes. So it’s perfectly possible that more than five of those top-10 economies actually have 100,000+ infections.

With the exception of Iran, the worst-hit nations are major economies. That’s probably because those are so interconnected and so many people were routinely moving between them for business or pleasure before travel restrictions were implemented. But emerging economies are likely to be hit hard soon. And the human costs in those could be higher than in advanced nations.

But, while markets are made up of people who share the fears 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.

Economic worries

We’ve been hearing about the damage low oil prices has been wreaking on oil and fracking companies and those who’ve invested in them or lent to them. But countless other sectors are severely affected, from airlines to restaurants and leisure — and from automakers to financial institutions.

Economists are currently predicting that tomorrow’s GDP figures for the first quarter of this year will show a 3.7% contraction in the US economy., according to MarketWatch But research firm Capital Economics revealed last Friday its expectations for the second quarter. And those are of a whopping 40% contraction between April 1 and June 30.

Consumer spending down

We can already see the impact on consumer spending of COVID-19’s jobs toll, which in America stands at over 26 million. Last week, Discover reported on its cardholders’ year-over-year activity so far in April:

Discretionary spend is down 33%, driven by the travel category, which, although only 8% of cardholder spending, is down 99%, and by retail, which is down 11%.

And, also last week, American Express said its cardmembers were similarly cutting back, with spending on travel and leisure down 95% in April. Amex has already set aside $1.7 billion to cover losses. And it warned that more will be needed

Few economists think we’ll escape a recession and some expect a depression.

Global threat

Last week, a senior policymaker at the Bank of England (Britain’s central bank, so its equivalent of the Fed) suggested: ” … we are experiencing an economic contraction that is faster and deeper than anything we have seen in the past century, or possibly several centuries.”

And such mayhem looks unlikely to be confined to Europe. On April 14, the International Monetary Fund (IMF) issued a fairly dire warning. According to a report that day in The Financial Times:

The coronavirus crisis will leave lasting scars on the global economy and most countries should expect their economies to be 5 per cent smaller than planned even after a sharp recovery in 2021, the IMF said on Tuesday.

Forecasting that this year would be the worst global economic contraction since the Great Depression of the 1930s, Gita Gopinath, the fund’s chief economist, said the world outlook had “changed dramatically” since January with output losses that would “dwarf” the global financial crisis 12 years ago.

Don’t take forecasts too seriously

Of course, such forecasts are justifiably worrying and must be taken seriously. But don’t assume that they’re going to prove wholly accurate.

A headline in last Monday’s Financial Times summed up the situation during this pandemic when so little is certain: “Banks are forecasting on gut instinct — just like the rest of us.”

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.

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. Or why, last Friday, the forward price-to-earnings ratio for S&P 500 companies hit its highest level since December 2001.

Last Saturday’s Financial Times ran the headline, “Wall Street bets on a Big-Tech rebound.” But within the article said, “Valuations do not reflect the risks that still lie ahead from coronavirus.”

Aren’t investors seeing the same death tolls, infection rates, unemployment rates and GDP forecasts as the rest of us? Do they think company earnings aren’t taking severe hits?

Sly like a fox? Or not?

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 of dollars into the economy will see the big companies in which they invest emerge largely unscathed — or even stronger as smaller competitors go to the wall.

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.

But this strategy’s success depends on a very quick economic recovery (a so-called V-shaped recession) once the COVID-19 threat dissipates. Yes, 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 be too shocked that investors are shrugging off virtually every domestic economic report. The landscape has changed so profoundly in the last few weeks that most data for March and the first quarter are already so out of date as to be next to useless. They largely reflect a pre-coronavirus world.

But, as we explained in the previous section, markets seem determined to go their own way, no matter what the real world is doing. So it would be no surprise if they ignored this week’s April figures, too. Those include the consumer confidence index on Tuesday and the Institute of Sales Managers’ (ISM’s) manufacturing index on Friday.

The Federal Open Market Committee (FOMC) is meeting this week. That’s the Federal Reserve policymaking body that determines the organization’s interest rates. Watch out for a news conference at 2:30 p.m. (ET) on Wednesday, led by Fed Chair Jerome Powell. Few expect any surprise announcements but Powell’s commentary will be closely watched.

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: April consumer confidence index (actual –86.9 index points; forecast 90.0; March 118.8) and March advance trade in goods (actual -$56.5 billion; forecast -$56.0 billion)
• Wednesday: gross domestic product (GDP) for the first quarter (forecast -3.7%), pending home sales index for March (no forecast but +2.4% in February). FOMC news conference
• Thursday: Weekly jobless claims to April 25 (forecast 3.50 million new claims for unemployment insurance). March personal income (forecast -1.1%), consumer spending (forecast -6.9%) and core inflation (forecast -0.1%)
• Friday: April ISM manufacturing index (forecast 35.0%) and March construction spending (forecast -3.9%)

If markets pay attention to any of those, it’s likely to be Tuesday’s consumer confidence index and Friday’s ISM manufacturing index. They may glance at Wednesday’s GDP figures, too. But, if recent history is any guide, they may well ignore them all.