However, we’re still in the earnings season, when publicly traded companies publish their previous quarter’s figures. And, this week, American Express, Capital One, IBM, Intel, Netflix and United Airlines are among those releasing numbers.

Today’s drivers of change

What 2020 might hold

The year 2019 ended with most stock indexes at exceptional or record highs. And investors have had one of the best 12 months in living memory. So will 2020 bring more of the same?

Few think it will. But most economists, analysts and observers seem to believe we’re looking at an OK year. Certainly, fewer are expecting a US recession during the period than was the case a few months ago. When Reuters polled economists in November, only 25% thought one was likely, down from 35% in October. However, when polled again in December, 40% expected one within two years.

That December poll also saw a consensus of the economists who responded forecasting disappointing growth in US gross domestic product (GDP) this year. Indeed, most expected it to be in a range between 1.6%-1.9% between now and mid-2021.

The Federal Reserve’s role

And a number of financial reviews of 2019 have warned that market rises have largely been fueled by the Federal Reserve’s actions rather than underlying economic strength. But the Fed’s supply of metaphorical gas to maintain such momentum is running low — as is its willingness to use what’s left.

So market growth this year may be way more modest than in 2019, though many reckon it will remain positive. On Jan. 6, The Financial Times carried an analysis under the headline, “Fed looks forward to ‘boring’ 2020 after frenetic year.”

Don’t take forecasts too seriously

But don’t take such forecasts too seriously. 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.

Real world forecasts also gloomy

On Monday, Jan. 20, global accountancy firm PwC unveiled its 23rd annual survey, which this year polled almost 1,600 chief executive officers (CEOs) from 83 countries. A whopping 53% of respondents predicted a decline in global GDP growth in 2020. That was up from 29% in 2019 and 5% in 2018.

Who was most pessimistic? Those from North America, where 63% of CEOs expected lower global growth. And only 36% of American CEOs were positive about their own companies’ prospects for the year ahead. Again, that was many fewer than in 2019. Chair of the PwC network Bob Moritz issued a statement:

Given the lingering uncertainty over trade tensions, geopolitical issues and the lack of agreement on how to deal with climate change, the drop in confidence in economic growth is not surprising — even if the scale of the change in mood is. These challenges facing the global economy are not new — however the scale of them and the speed at which some of them are escalating is new.

Lower mortgage rates ahead?

It’s not hard to find experts who predict that mortgage rates could plumb new depths in 2020. And they may be proved right.

Those issues highlighted in the PwC survey are real. A recession still might arise. The phase-two US-China trade talks could collapse and the whole dispute escalate. The Wuhan coronavirus could mutate and turn into a devastating pandemic. Or some undreamed-of crisis could come out of nowhere. Any of those could send those rates plummeting.

Just don’t forget John Kenneth Galbraith’s observation.

Rate forecasts for 2020

It may be a mistake to rely on experts’ 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 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. 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 were published in January 2020, except Freddie’s, which usually appears toward the end of each month:

Freddie Mac reckons that particular mortgage rate averaged 3.9% during 2019. So, if the experts’ forecasts turn out to be right, it could be another good year for new mortgage borrowers — and for existing ones who want to refinance.

Negative mortgage rates

Just don’t expect zero or negative mortgage rates in America anytime soon. Still, they’re not unthinkable within a year or two.

Already, Denmark’s Jyske Bank is offering its local customers a mortgage with a nominal interest rate of -0.5%. Yes, that’s 0.5%. However, after fees, that’s likely to be closer to a free or incredibly cheap mortgage than one that actually pays borrowers.

But don’t think there isn’t a wider price to pay for ultralow mortgage rates. On Dec. 18, The New York Times reported that, in much of Europe, these are “driving a property boom that is pricing many residents out of big cities and causing concern among policymakers.” And many fear a bubble that could end badly.

Trade

For now, trade may be on the back burner for markets. That’s because, on January 15, President Donald Trump took a “momentous step” when he signed the much-heralded, 86-page, phase-one trade agreement with China’s Vice-Premier Liu He at the White House. “It just doesn’t get any better than this,” the president remarked.

The wide-ranging deal covers some important areas, including commitments from China to:

• Buy $200 billion-worth of specific US products over the following two years
• Better protect American companies’ intellectual property
• Stop the transfer of technologies from the US
• Cease manipulating its currency

Also on Jan. 15, The Washington Post quoted the U.S. Chamber of Commerce’s Myron Brilliant:

So why did markets respond in such muted ways to the signing? And why should you still see trade disputes as a continuing factor in future mortgage rates?

Critics’ views of the phase-one trade deal

Well, some perceive the deal as weak in key areas:

1. No independent dispute resolution — If the US believes China is reneging, it can only engage in further talks and introduce new tariffs
2. Some doubt China’s ability to make good on its $200 billion purchasing commitment
3. The intellectual property sections contain little that’s new — They mostly restate existing agreements
4. There is no provision for reining in China’s system of government subsidies for industries
5. It fails to address concerns about cybersecurity and the Chinese hacking of American companies’ IT infrastructures

The White House would argue that those alleged weaknesses will be addressed in a phase-two deal. But most think that’s unlikely to materialize until after this year’s presidential election.

Pain

However, perhaps the new deal’s biggest drawback is that it leaves so many tariffs still in place. According to an analysis, published on the day of the signing, by the Peterson Institute for International Economics:

Even with the phase one deal in effect, Trump will have increased the average US tariff on imports from China to 19.3% from 3.0% in January 2018. The deal means the average US tariff will be reduced only slightly from its current level of 21.0%.

And this dispute has been causing some pain to both sides. China’s slipped to third place from first in the Census Bureau’s list of America’s trading partners. And its economy is certainly under strain. Indeed, on Jan. 17, China reported its slowest annual GDP growth in 29 years — though that was still +6.1% in 2019.

But the dispute’s impact here has also been painful for many.

Higher prices for American families

A September study by the nonpartisan National Foundation for American Policy estimated, “the tariffs will cost the average household $2,031 per year, and will be recurring so long as the tariffs stay in effect.”

Now, the White House would undoubtedly challenge that figure, as do some more independent analyses. Some believe that American businesses are bearing much of the cost and are yet to pass that on to consumers. And prices may rise significantly only when stocks of goods that arrived before tariffs were introduced are exhausted. Many importers increased their orders earlier last year to get in ahead of tariff implementation dates.

But, on Dec. 2, New York Federal Reserve Bank researchers published a report that showed that American businesses and consumers were indeed bearing the brunt of the tariffs. They found Chinese import prices fell by only 2% between June 2018 and September 2019. And that means Americans were picking up the rest of the tab on tariffs as high as 25%. It’s how the pain is distributed that’s disputed.

Of course, both those studies were conducted before the new phase-one deal was announced. Now that’s signed, you can shave perhaps 11% off additional tariff costs, according calculations by Yahoo! Finance.

European Union next?

The president occasionally makes bellicose remarks about what he perceives to be an unfair trade imbalance between the US and the European Union. The EU is the world’s biggest trading bloc. Together, its member states form a larger economy than China or even America.

But, on Dec. 17, US trade representative Robert Lighthizer made an ominous remark. He said that President Trump is now “focused” on trade with the EU. The Financial Times that day interpreted the comment as meaning “the Trump administration was ready to escalate its trade confrontation with the EU

The administration has already in 2019 imposed tariffs on nearly $10 billion worth of imports from the EU, including $2.4 billion on French luxury goods in December. However, a couple of glimmers of light have emerged during the World Economic Forum in Davos (Jan 21-24), which was attended by the president and other world leaders.

On Tuesday, French officials were suggesting that a temporary trade truce had been agreed to allow for further talks. And, on Wednesday, hopes for a new US-EU trade agreement grew. Yesterday’s Financial Times has a headline, “Trump and EU promise to press on to reach trade deal.”

How trade disputes hurt

All this has been fueling uncertainty in markets. And that, in turn, created volatility. Many of the recent wild swings in mortgage rates, bond yields, stock markets, and gold and oil prices have been down to hopes and fears over trade.

Markets generally hate trade disputes because they introduce uncertainty, dampen trade, slow global growth and are disruptive to established supply chains. President Trump is confident that analysis is wrong and that America will come out a winner.

Impeachment

On Dec. 18, in a vote almost wholly along party lines, the House of Representatives passed two articles of impeachment against President Trump. One is for abuse of power and the other for obstruction of Congress.

And, on Jan 21, the Senate began a trial based on those articles. You may think it unlikely that the current Republican-dominated Senate will convict the president.

On Sept. 25, The New York Times suggested moves in the House to impeach the president may have only a limited effect on markets. It used the word “fleeting” to describe the probable impact.

Later, on Dec. 19, the Times reiterated that view:

… the stock market has been largely unfazed by the news of impeachment proceedings, and that is unlikely to change …

And, at least so far, the Times’s predictions seem to be holding up, in spite of some continuing dramatic scenes on Capitol Hill.

The Middle East

Well, that didn’t last long. Iran retaliated on Jan. 8 for the killing by the US of one of its top generals on Jan. 3. Tehran hit back with missile strikes on bases in Iraq that are used by US troops. However, there were no deaths and light casualties. And neither side was left with any appetite for heightening tensions or escalating the conflict. So the whole thing was over within a few days.

Of course, it’s not really over. Iran still wishes to see all US forces leave the Middle East. And the US would like to see a new, more amenable regime in Tehran. Both sides are likely to continue to work toward those goals, sometimes using munitions.

But, for now, the dispute that threatened a war that might have engulfed the, er, Gulf, the wider Middle East and — according to some — the world is back in sleep mode. And those interested in markets and mortgage rates can now ignore it — at least until someone wakes it up.

Brexit

For the first time since 2016, Brexit was playing a major role in the determination of American mortgage rates during part of October 2019. Brexit is Britain’s exit from the European Union (EU) after 46 years of membership of the world’s largest trading bloc.

A UK general election on Dec. 12 delivered a majority for Prime Minister Boris Johnson that assured that Brexit will become law this month. The bill became the EU (Withdrawal Agreement) Act when it was signed into law by Queen Elizabeth II yesterday, Jan 23.

Enactment will see the UK enter a transitional period that will last at least until the end of 2020. During that time, Britain will continue to have the duties and benefits of EU membership. And it will be attempting to negotiate a mutually acceptable trade deal with the EU.

What happens after that could have a huge impact on the British and global economies. But, absent unforeseen upheaval, Brexit now looks unlikely to exert much influence on American mortgage rates, at least until late in the year.

Treasurys and mortgage rates

Why are mortgage rates currently so often out of sync with the markets they usually shadow? After all, markets are generally interdependent.

During economically worrying times (the opposite happens when confidence is high), investors sell stocks because they fear a downturn. But they have to put their money somewhere. So they buy lower-yield but safer “risk-off” investments, such as US Treasurys, gold and mortgage-backed securities (MBSs).

MBSs are bundles of individual mortgages, wrapped up within a bond-like “security” (a tradable financial asset) and sold on a secondary market. And, the more investors want to buy them, the lower the mortgage rate you’re likely to be offered.

Markets in sync

Usually, the flows of money are fairly even across risk-off markets. So you can typically assume that gold and bond prices will go up or down roughly in line both with each other and inversely with falling or rising stock prices.

And the same applied to MBSs. In fact, the relationship between 10-year Treasury yields and mortgage rates was for years so close that many (wrongly) assumed the two were formally linked.

Why the change?

But nobody could make that mistake now. For example, on Jan. 3, those yields fell nearly 9 basis points (a basis point is one hundredth of one percentage point). But average mortgage rates inched down by only 1 basis point.

Indeed, divergences have become routine.

So why are the MBSs that actually determine mortgage rates drifting apart from risk-off investments generally and those Treasury yields in particular? There are three main reasons:

1. Investors are concerned they’re not being rewarded sufficiently for the extra risk they shoulder when they buy MBSs rather than Treasury bonds. In particular, the US Treasury never welshes or redeems its bonds early, making those ultrasafe and predictable. Meanwhile, mortgage borrowers often refinance and occasionally default
2. Some are worried about government reform of Fannie Mae and Freddie Mac. On Oct. 28, National Mortgage Professional magazine suggested, ” … we have now seen the implementation of the first steps, some of which have only increased market volatility.”
3. The things that spook or please investors in Treasury bonds don’t always apply to mortgage-backed securities

And another factor affects mortgage rates rather than MBSs themselves. Mortgage lenders are distrustful of extreme volatility and often take a wait-and-see stance before adjusting the rates they offer

Forecasting issues

Those Treasury yields are one of the main indicators (see the “market data” list above for others) we use to make predictions about where rates will head.

And, with those tools more unreliable than usual, we sometimes struggle to get our daily predictions right. Until the relationship between rates, yields and other indicators gets back in sync, you should bear that in mind.

Rate lock recommendation

We suggest

We suggest that you lock if you’re less than 30 days from closing. True, mortgage rates have been moving within unusually tight ranges in recent months. So the risk of floating for longer may be limited. But the prospect of worthwhile gains seems similarly restricted.

Of course, markets are likely to move more sharply and decisively sometime soon. But the trigger that causes that is far from apparent. And that means the direction in which they’ll take off is equally unknown.

However, none of this means we expect you to lock on days when mortgage rates are actively falling. That advice is intended for more normal times.

Of course, financially conservative borrowers might want to lock immediately, almost regardless of when they’re due to close. After all, current mortgage rates remain exceptionally low and a great deal is assured. On the other hand, risk-takers might prefer to bide their time and take a chance on future falls. But only you can decide on the level of risk with which you’re personally comfortable.

If you are still floating, do remain vigilant right up until you lock. Continue to watch key markets and news cycles closely. In particular, look out for stories that might affect the performance of the American economy. As a very general rule, good news tends to push mortgage rates up, while bad drags them down.

When to lock anyway

You may wish to lock your loan anyway if you are buying a home and have a higher debt-to-income ratio than most. Indeed, you be more inclined to lock because any rises in rates could kill your mortgage approval. If you’re refinancing, that’s less critical and you may be able to gamble and float.

If your closing is weeks or months away, the decision to lock or float becomes complicated. Obviously, if you know rates are rising, you want to lock in as soon as possible. However, the longer your lock, the higher your upfront costs. On the flip side, if a higher rate would wipe out your mortgage approval, you’ll probably want to lock in even if it costs more.

If you’re still floating, stay in close contact with your lender, and keep an eye on markets.

My advice

Bearing in mind professor Galbraith’s warning, 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.

What causes rates to rise and fall?

Mortgage interest rates depend a great deal on the expectations of investors. Good economic news tends to be bad for interest rates because an active economy raises concerns about inflation. Inflation causes fixed-income investments like bonds to lose value, and that causes their yields (another way of saying interest rates) to increase.

For example, suppose that two years ago, you bought a $1,000 bond paying 5% interest ($50) each year. (This is called its “coupon rate” or “par rate” because you paid $1,000 for a $1,000 bond, and because its interest rate equals the rate stated on the bond — in this case, 5%).

• Your interest rate: $50 annual interest / $1,000 = 5.0%

When rates fall

That’s a pretty good rate today, so lots of investors want to buy it from you. You can sell your $1,000 bond for $1,200. The buyer gets the same $50 a year in interest that you were getting. It’s still 5% of the $1,000 coupon. However, because he paid more for the bond, his return is lower.

• Your buyer’s interest rate: $50 annual interest / $1,200 = 4.2%

The buyer gets an interest rate, or yield, of only 4.2%. And that’s why, when demand for bonds increases and bond prices go up, interest rates go down.

When rates rise

However, when the economy heats up, the potential for inflation makes bonds less appealing. With fewer people wanting to buy bonds, their prices decrease, and then interest rates go up.

Imagine that you have your $1,000 bond, but you can’t sell it for $1,000 because unemployment has dropped and stock prices are soaring. You end up getting $700. The buyer gets the same $50 a year in interest, but the yield looks like this:

• $50 annual interest / $700 = 7.1%

The buyer’s interest rate is now slightly more than 7%. Interest rates and yields are not mysterious. You calculate them with simple math.

Mortgage rate methodology