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Important notes on today’s mortgage rates

Freddie Mac’s weekly rates

Don’t be surprised if Freddie’s Thursday rate reports and ours rarely 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 And, by publication day, they’re often already out of date. So you can rely on Freddie’s accuracy over time, but not necessarily each day or week.

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 (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 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. 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 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.

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 last half. 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.

Indeed, a report on Wednesday of an Inside Mortgage Trends study found higher-than-normal credit scores were more common than is usual. So, during the second quarter of this year, 72.69% of Fannie and Freddie refinances went to borrowers with credit scores of 740 or higher. That was up from 65.55% in the first quarter. And only 9.23% of those refinances had scores below 700 in the most recent three-month period, says Inside Mortgage Finance.

All this makes it even more important than usual that you shop widely for your mortgage and compare quotes from multiple lenders.

Still, there are signs in studies by Fannie Mae and the MBA that the screw is turning more slowly. And some forecast that a number of lenders will begin to loosen restrictions “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.

Now and later

Employment and retail sales figures (among many others) have been much better than expected over the last month or so.

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 were published. Those revealed that the Fed expected:

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

On July 6, Goldman Sachs issued warnings about the effects on the nascent recovery of pausing the relaxation of lockdown rules. “The recent declines are minor compared to the collapse in activity in March and April,” said chief economist Jan Hatzius. “But they clearly indicate a break from the steady upward trend since mid-April.”

Results season

Meanwhile, we’re in the early stages of a fresh earnings season, when publicly traded companies publish their quarterly results. Barron’s is predicting this will be “ugly,” while CNN expects it to be “awful.”

Some are especially worried about tech giants being potentially overvalued. And this week sees results released for many of these, including IBM, Microsoft and Intel.

The question is, how much will markets care about any of these figures.?

COVID-19 still a huge threat

The pandemic is the single biggest influence on markets at the moment. And COVID-19-related news continues to be depressing. The 14-day change in new cases across America was +24% yesterday, according to The New York Times.

That’s been trending lower in recent days. Does it mean the tightening of containment measures in some states is working? Maybe.

But infections still rose by 69,998 cases nationwide yesterday, says the Times. In a White House virus briefing on Tuesday, 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.

Deaths follow infections upward

Until recently, some had been taking comfort because the number of new COVID-19 deaths in the US was falling, even as the infection rate rose. But that’s no longer true as the death rate has resumed its upward path while new infections are slowing in many places across the country.

The 14-day change in the number of deaths was again +41% yesterday, the Times reckons. And at 1,116, the number of deaths nationwide continued its very recent run of 1,000+ daily mortalities. Note the difference between 14-day changes and daily numbers.

Deaths are bound to lag behind new infections. So we can at least hope to see them plateau within weeks — providing new cases don’t begin to climb sharply again.

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.

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 on Tuesday when the administration forced the closure of the Chinese consulate in Houston, TX. In a tit-for-tat move yesterday, Beijing announced it was closing the US consulate in Chengdu. As The Financial Times suggested this morning:

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. Yesterday, the US passed one grim milestone when the number of confirmed infections broke through the 4-million mark. And an even grimmer milestone is in view: we’re likely to record the 150,000th American deaths within days.

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 — Yesterday’s new claims for unemployment insurance were higher than feared
3. On July 17, the Federal Reserve Bank of Atlanta’s GDPNow running resource put its real GDP growth forecast for the second quarter at -34.7% (yes, that a minus)
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 IMF Chief Economist Gita Gopinath put it on June 24: “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 — or not?

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.

Is it any surprise that we’ve recently been accusing markets (or the investors who make them up) of being untethered from reality? Or that 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 July 12, The Washington Post quoted Moody’s Analytics chief economist Mark Zandi:

The stock market and the economy have parted ways. I’m not sure what will trigger a sustained sell-off in stocks, but surging [virus] infections and another round of more business closures will be difficult for investors to ignore much longer.

Amateurs bored by lockdown?

On June 16, controversial, Nobel-prizewinning 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.

Cognitive dissonance? For some

Some, such as Krugman, see this as a response to the boredom of lockdown, with inexperienced and unknowledgeable amateur investors piling into a high-risk environment.

For more seasoned investors, the fact that Federal Reserve interventions effectively (though not yet directly) prop up stock markets is a continuing source of comfort. Some even believe the Fed might start buying stocks itself in the event of a collapse in confidence, though that would raise all sorts of issues.

Economic reports this week

Last week was an exceptionally busy one for economic reports. But this week is exceptionally quiet.

Few of this week’s reports would stir much interest in investors at the best of times. In these unique circumstances, when markets have so much else to look at, it was no surprise that the data had little impact.

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: Nothing
• Wednesday: June existing home sales (actual 4.72 million homes sold; forecast 4.87 million — seasonally adjusted annualized rate)
• Thursday: Weekly new jobless claims to July 18 (actual 1.42 million new claims for unemployment insurance; forecast 1.41 million)
• Friday: June new home sales (actual 776,000 new homes sold; forecast 710,000 — seasonally adjusted annualized rate)

There was little to set the pulse racing there.