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Important notes on today’s mortgage rates

Don’t be surprised if Freddie Mac’s rate reports and ours don’t exactly coincide. To start with, the two are measuring different things: weekly and daily averages. But also, Freddie tends to collect data on only Mondays and Tuesdays each week. And, by their publication each Thursday, they’re often already out of date. So you can rely on Freddie’s accuracy over time, but not necessarily each day or week.

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 (so-called top-tier borrowers). And, even then, the state in which you’re buying can affect your rate.

Still, prior to locking, everyone buying or refinancing 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.

Overall, we still think it possible that the Federal Reserve’s going to drive rates even lower over time. 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.

Rate lock advice

My recommendation reflects the success so far of the Fed’s actions. 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.

The Fed might end up pushing down rates even further over the coming weeks, though that’s far from certain. (Read on for specialist economists’ forecasts.) And 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.

What economists expect for mortgage rates

This month, economic reports may have changed a lot of economists’ expectations. Pretty much everyone was shocked by the latest, much better-than-expected employment and retail sales figures. But many were sobered by the Federal Reserve’s worrying forecasts for economic growth and employment on June 10.

It’s too soon to say that those have transformed the economic landscape. But read the following with the knowledge that at least one of the forecasts cited was made well before any of those events.

Looking good … to most

On May 21, Realtor.com Chief Economist Danielle Hale predicted low mortgage rates for the foreseeable future. Of course, it’s unlikely she meant there would be a continuing straight line that only went downward. Some rises along the way are pretty much inevitable.

“We expect mortgage rates to stay low and possibly slip lower,” Hale said on Realtor.com. “We’ll flirt with the 3% threshold for a while before we go below it.”

And she’s already been proved right. But, of course, not all experts share Hale’s rosy view, at least over the medium term. Indeed, her own publication, Realtor.com, said recently that it thought rates could soon rise above their then-current sub-3% level.

See the table below for forecasts from Fannie Mae, Freddie Mac and the Mortgage Bankers Association (MBA).

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. All (including Freddie’s, which is now a quarterly report) were published in mid-May.

So, suddenly, Fannie Mae’s optimism is the outlier. And nobody’s expecting a quarterly average below the 3.0% mark this year.

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% throughout next year, while Freddie’s anticipating 3.2%. And the MBA thinks it will be back up to 3.5% for the last half of 2021. 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.

Mortgages tougher to get

The mortgage market is currently very messy. And some lenders are offering appreciably lower rates than others.

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.

That credit tightening in figures

Recent studies by Fannie Mae and the MBA show this tightening is real. To quantify the extent, the MBA’s May Mortgage Credit Availability Index (MCAI) report, published June 9, showed the index falling less sharply than in April: by 3.1%. However, it’s important to recognize that any fall represents a tightening in the credit standards lenders use. So things may not be getting worse as quickly as they were but they’re still getting a little worse.

However, some see some light in this gloom. When in mid-May National Mortgage Professional magazine hosted an expert panel discussion about mortgages for those with “credit issues in the past such as foreclosures, bankruptcy, late payments or other isolated credit issues,” there were knowledgeable participants who expected a resurgence in activity soon.

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.

And, in spite of those recent, better-than-expected reports, there’s unfortunately plenty of potentially bad news that could have a negative effect on the US and global economies.

Indeed, last Wednesday, the International Monetary Fund (IMF) released its forecasts for growth this year. And it expects the global economy to shrink by 4.9%, much worse than its 3% estimate in April.

The IMF’s expectations for the US economy are even more dire. Its latest forecast for that suggests likely shrinkage of 8%. Is it any consolation that it thinks the eurozone countries will do even worse, with negative growth north of 10%?

COVID-19 still a huge threat

Last Friday, we cited The New York Times’s figure for the increase in the number of new cases reported in America over the previous 14 days. It stood at a grim +53% rise. But, by yesterday, that had grown to a deeply depressing +76%.

Those who’d hoped the relative containment of the coronavirus in the North East would see a sustained fall in new infections across the country have been disappointed. This morning, The Times reported a rising trend in the infection rate in 32 states over the past two weeks.

The rises were small in places such as Alaska, Hawaii and Montana. But very steep in Arizona, Texas, Florida, South Carolina and Mississippi and several others.

Deaths likely to follow infections

Some take comfort in the number of new COVID-19 deaths in the US falling. And The New York Times figure yesterday for that measure was a much more encouraging -26% over the past 14 days.

But that figure is worse than last Friday’s -30%. So the curve might be flattening in a bad way. And scientists warn that mortalities always lag behind infections.

Indeed, last Wednesday, Nicholas G. Reich, associate professor of biostatistics at the University of Massachusetts at Amherst, told The Washington Post: “As long as there is a fair amount of testing going on, if there is an uptick in covid-19 infections, then we are likely to see that in the confirmed case data before we see it in the death data.”

Reich went on to say that he expected “… rises in covid-19 deaths over the next month in many of the states that are seeing upticks in cases, like Texas, California, Florida and others, even though the deaths have been either steady or declining in recent weeks.”

Non-pandemic news

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

Arguably tensions between Washington DC and Beijing are currently more strained than they’ve been for several years. And, on June 18, the US fell out with France, Britain, Italy and Spain over their proposals for taxing American companies on the profits they make those countries. Inevitably, those raise the possibility of a new trade war, perhaps on two fronts.

As worryingly, an actual war could be brewing on the border between India and China. Those (both nuclear powers) are the world’s two biggest countries by population and rank second and fifth by gross domestic product (GDP). On June 15, a skirmish resulted in 97 Indian casualties, including 20 deaths. China has not released figures for its toll.

True, this dispute has faded from the headlines recently. But, on June 25, the BBC showed satellite photographs taken that week of new Chinese military structures being built in the disputed border area. It may not be over.

Domestic threat

Most important recent economic data have been looking good. For example, the latest employment and retail sales numbers were way better than most economists expected. 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 — For the past two Thursdays, new weekly jobless claims were actually worse than anticipated
3. On June 26, the Federal Reserve Bank of Atlanta’s GDPNow running resource put its real GDP growth forecast for the current quarter at -39.5% (yes, that a minus). However, it’s worth noting that the figure has dropped sharply from earlier readings
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 we’ve been saying for a while now, not only are we not yet out of the woods, but we may still have no clue where their boundaries are located.

Indeed, that exact sentiment was echoed last Wednesday by IMF Chief Economist Gita Gopinath, who said: “We are definitely not out of the woods. This is a crisis like no other and will have a recovery like no other.”

What shape will a recession take?

Economists are squabbling about the shape (if you pictured it on a graph) the recession might take.

For a while, a V-shaped one (sharp dip and sharp recovery) was favorite. And it still is for some. Indeed, they may well be preening themselves following the latest employment and retail sales reports.

But other shapes are available. So some think a W more likely, especially if there’s a second wave of coronavirus infections following the early ending of lockdowns. A “Nike swoosh” (based on that company’s famous logo) is gaining popularity. That’s a sharp drop followed by a gradual recovery. Most recently, a reverse square-root symbol (√ but backward) has gained in popularity.

But on May 29, The New York Times urged everyone to “Forget swooshes and Vs. The economy’s future is a question mark.” By which it meant, quit squabbling because nobody has a clue.

Markets seem untethered from reality — or not?

We’ve recently been accusing markets (or the investors who make them up) of being untethered from reality. And we’ve been quoting a May 15 headline in The New Yorker: “Have the Record Number of Investors in the Stock Market Lost Their Minds?”

On June 16, controversial, Nobel-prizewinning, Princeton economist Paul Krugman wrote this for The New York Times:

What are these investors thinking? I don’t think they are thinking — not really. The conventions of financial reporting more or less require that articles about market action ascribe rationality to investors, so stock movements are attributed to optimism about economic recovery, or something. But the reality is that we’re largely talking about young men, many with a background in sports betting, who have started buying stocks and are bullish because they’ve made money so far.

On June 14, CNN Business reported that just one online brokerage, TD Ameritrade, had opened 608,000 new accounts during the first quarter of this year. That was more than double the number in the previous quarter. Some, such as Krugman, see this as a response to lockdown, with inexperienced and unknowledgeable amateur investors piling into a high-risk environment.

Economic reports this week

Because Independence Day falls on a Saturday, Friday is a public holiday. (And this daily report won’t appear then.) That means the monthly employment situation report — arguably the single most important economic report right now — will appear on Thursday.

Recently, markets have been shrugging off negative data but they’re in a strange mood at the moment. And we’ll have to wait to see how they react on Thursday.

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: May Pending home sales index (actual +44.3%; no forecast but -21.8% in April)
• Tuesday: June consumer confidence index (forecast 90.8 index points)
• Wednesday: June ISM* manufacturing index (forecast 50.6%) and May construction spending (forecast +0.6%). Plus publication of the minutes of the FOMC’s** last meeting
• Thursday: June employment situation report, including nonfarm payrolls (forecast +3.5 million), unemployment rate (forecast 12.4%) and average hourly earnings (forecast -1.0%).
• Friday: Nothing — public holiday. And no “Mortgage Rates Today” edition from The Mortgage Reports

* ISM is the Institute for Supply Mangement