Forecast plus what’s driving mortgage rates today
Average mortgage rates fell moderately yesterday. Other markets moved more sharply. But those rates changed enough for many borrowers to be getting rates that are the best seen in eight years.
The Dow Jones Industrial Average saw a record drop yesterday and — absent a screeching U-turn — stock markets globally look set to have their worst week since the financial crisis. Normally, you’d expect that to result in sharply lower mortgage rates. But those are becoming untethered from other markets. So appreciable falls today, while likely, may not be as big as you might think.
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| Program | Rate | APR* | Change |
|---|---|---|---|
| Conventional 30 yr Fixed | 4 | 4 | Unchanged |
| Conventional 15 yr Fixed | 3.75 | 3.75 | Unchanged |
| Conventional 5 yr ARM | 4.75 | 4.208 | Unchanged |
| 30 year fixed FHA | 4.063 | 5.054 | -0.06% |
| 15 year fixed FHA | 2.875 | 3.82 | Unchanged |
| 5 year ARM FHA | 3.25 | 4.265 | Unchanged |
| 30 year fixed VA | 3.5 | 3.684 | Unchanged |
| 15 year fixed VA | 2.75 | 3.076 | -0.69% |
| 5 year ARM VA | 3.125 | 3.42 | Unchanged |
| Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here. | |||
So mortgage rates today look likely to move lower. While, as always, events may overtake that prediction, they’d have to be pretty shocking ones today.
Market data affecting today’s mortgage rates
First thing this morning, markets looked set to deliver mortgage rates today that are lower. By approaching 10 a.m. (ET), the data, compared with roughly the same time yesterday morning, were:
- Major stock indexes were sharply lower. (Good for mortgage rates.) When investors are buying shares they’re often selling bonds, which pushes prices of Treasurys down and increases yields and mortgage rates. The opposite happens when indexes are lower
- Gold prices fell to $1,617 an ounce from $1,659. (Bad 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
- Oil prices fell to $45.24 a barrel from $46.28. (Good 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 tumbled to 1.17% from 1.26%. (Good for mortgage rates.) More than any other market, mortgage rates tend to follow these particular Treasury bond yields
- CNN Business Fear & Greed index fell to 9 from 14 out of a possible 100 points. (Good 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
Today might be another good day for mortgage rates. But not quite as good as some of those market changes suggest.
This week
Virus still big factor for mortgage rates
The Wuhan coronavirus (Covid-19, standing for Coronavirus disease 2019) was certainly behind the mayhem we saw in markets around the world this week. The virus now has a confirmed presence on five continents and in 59 countries, up from 56 yesterday.
And, on Wednesday, the World Health Organization (WHO) said that, for the first time, there were more new cases confirmed on Tuesday outside China than inside. You might think the challenges of containing Covid-19 have grown exponentially since it stopped being effectively restricted to one country. South Korea, Japan, Italy and Iran each has hot spots with infections in the hundreds or low thousands.
Yesterday, Japan announced that it was closing all schools from March 2 until the end of spring break, which is typically toward the end of that month. At about the same time, Saudi Arabia said it was banning all pilgrimages to its holiest religious sites. And, as part of its contingency planning, the UK government said it could close British schools for two months if the coronavirus were to grip the country.
Covid-19 likely to spread outside and within US
The Centers for Disease Control and Prevention (CDC) warned on Tuesday that the coronavirus would probably spread within American communities. Dr. Nancy Messonnier, director of the National Center for Immunization and Respiratory Diseases, told journalists:
It’s not so much of a question of if this will happen anymore but rather more of a question of exactly when this will happen. … We are asking the American public to prepare for the expectation that this might be bad. … Disruption to everyday life might be severe.
On Wednesday, in a news conference, President Donald Trump provided a more upbeat take on the danger posed. “We’re very, very ready for this,” he said, adding that the risk to the US was “very low” and that he expected the outbreak to end swiftly. He announced that Vice President Mike Pence will lead the administration’s response.
Of course, those countries with sizable outbreaks are taking exceptional measures to contain the virus. But, from a purely economic standpoint, the inevitable and correct responses of governments that face sudden epidemics are negative. Travel bans, forced isolations and the closing of public spaces, schools and workplaces all cramp growth in gross domestic products. And that’s why markets have responded so sharply to recent news.
Mortgage rate volatility ahead?
In coming days and weeks, volatility will likely be driven by changing news cycles. Good news about the virus should normally see mortgage rates rise while bad news typically pushes them down. But such news isn’t always reliable.
Health experts can agree neither on the likely speed of the outbreak’s spread nor the severity of its outcomes. And they often issue contradictory statements almost simultaneously.
Meanwhile, governments are increasingly trying to craft narratives that head off panic over both the health and economic consequences of the epidemic. And not all of them are scrupulous about avoiding fake news. As a headline in Tuesday’s Financial Times warned about better figures from China, “Experts say decline in new infections is likely but official count also mired in politics.”
So markets that bend with every passing news cycle may turn out to be “lively,” to say the least. Still, our warning last week that “mortgage rates could bounce up and down like Tigger on E” has so far turned out to be wrong: movements have been fevered but the direction has been one-way. But it’s too soon to rule out the Tigger scenario in the future.
How scary are the health implications?
Overnight figures show Covid-19 has been confirmed in 83,906 (up from 82,588 yesterday) cases around the world, and has killed 2,869 (up from yesterday’s 2,814). Yes, those figures — assuming they’re accurate — show it to be way more infectious than others, such as SARS and MERS. But they also reveal a much lower death rate (3.4%) so far among those infected than that of either SARS (nearly 10%) or MERS (35%).
In fact, typical “seasonal” influenza (just your ordinary flu that comes around each year) has a death rate of about 1% of those who contract it. And you should note Covid-19’s current 2,869 death toll in that context. According to WHO, worldwide deaths from seasonal flu have averaged between 290,000 and 650,000 annually in recent years.
And, like seasonal flu, this new strain most severely affects those who are older (over 60 years) or who already have medical conditions that compromise their immune systems. Fatalities among those infected who are younger or middle-aged adults in good health are relatively rare.
But it would be premature to assume that Covid-19 is going to act in similar ways to seasonal flu. The president’s belief that it will fade out when spring arrives and the weather improves may well be proved correct. But many specialist doctors don’t share his confidence and say it’s too soon to be sure.
Still grounds for health fears
Of course, scientists are still learning about the outbreak’s epidemiology. So its mortality rate may rise or fall. And the virus itself could change (mutate) and become more or less infectious or deadly.
Meanwhile, you can certainly argue that our method of calculating the virus’s death rate is too crude. Tens of thousands are still sick and their outcomes unknown.
So, if you look only at the known outcomes (those previously infected and now officially declared well against those who’ve died) the mortality rate is closer to 7%. But that, too, is unreliable. Because most current patients are likely in low-risk groups. And many of those infected may have symptoms that are so mild (or nonexistent) that they don’t even realize they have the virus.
So it’s too soon to make definitive judgments.
Economic impact
But, leaving aside the health and human effects, the economic impact this outbreak has already had is severe. Recently, UBS economists slashed their 2020 GDP forecast for China to between +4% and +5%, down from +6.1% in 2019.
But it’s not just China that’s affected. On Feb. 12, UBS forecast that the Australian economy would shrink by between 0.1% and 0.5% this quarter, directly as a result of Covid-19. And many other countries are at risk of slower growth, with Japanese, Italian and South Korean governments all warning about the potential impact.
Indeed, on Feb. 11, Federal Reserve Chair Jerome Powell warned the House Financial Services Committee of the risk it poses to the economic outlook for the US as well as the rest of the world. And Goldman Sachs yesterday announced that it expects American companies to experience zero earnings growth in 2020. It calculates that the S&P 500 could fall another 7%.
But you don’t need the milky crystal balls used by economists to judge the risks. Markets are providing their own analyses.
Beyond China’s economic borders
Last Monday, Apple warned that its revenue forecasts for this quarter would be adversely affected by Covid-19. It blamed lower supply of iPhones from its factories in China coupled with lower demand from Chinese consumers. And, this week, both Microsoft and Anheuser-Busch InBev have said they expect their revenues to be seriously hit, too.
On Feb. 5, Chinese executives estimated that the nation’s oil consumption would be 25% lower this month, something that is disrupting oil markets worldwide. Meanwhile, other sectors inside China and outside are also being affected. Foreign importers are experiencing shortages in the goods they normally buy from the country. And, on Feb. 4, Bloomberg noted:
China is the largest exporter of intermediate manufactured goods that can be resold between industries or used to produce other things, so its problems quickly reverberate through global supply chains. Indeed, global reliance on those products doubled to 20% from 2005 to 2015.
Monday morning’s Wall Street Journal carried the headline, “World Economy Shudders as Coronavirus Threatens Global Supply Chains.”
Economic reports this week
This week’s economic reports included some important publications. Highlights that included gross domestic product (GDP) yesterday and personal income and consumer spending today. There were also consumer confidence and consumer sentiment readings on Tuesday and and this morning. But all were largely overshadowed by breaking news about the virus.
Of course, 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.
Forecasts matter
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 economic reports comprises:
- Monday: Nothing
- Tuesday: February consumer confidence index (actual 130.7 index points; forecast 132.5)
- Wednesday: January new home sales (annualized actual 764,000 new homes sold; forecast 720,000)
- Thursday: second reading of GDP for fourth quarter of 2019 (actual +2.1%; forecast +2.15%). Plus January durable goods orders (actual -0.2%; forecast -1.0%)
- Friday: January personal income (actual +0.6%; forecast +0.4%) and consumer spending (actual +0.2%; forecast +0.3%). Plus January’s core inflation (actual +0.1%; forecast +0.2%). And February’s consumer sentiment index (actual 101.0 index points; forecast 100.9)
As it turned out, markets couldn’t avert their gazes from the impact of the coronavirus to pay much attention to domestic 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 had one of the best 12 months in living memory. So will 2020 bring more of the same? Well, Covid-19 has already eaten up this year’s gains in most markets.
But, even absent the virus, few think the good times will continue for long. Still, in January, most economists, analysts and observers seemed to believe we were looking at an OK year.
Certainly, fewer were expecting a US recession during 2020 than was the case a few months ago. When Reuters polled 100 economists in January, about 20-25% thought one was coming this year and around 30-35% expected one within the next two years. And February’s poll “found the overall U.S. economic growth outlook for this year unchanged compared with last month.”
But that’s not great news. Because January’s survey saw a consensus expectation that the US economy would “coast” this year, “with annualized growth expected to have barely moved from the latest reported rate of 2.1%” through to the second quarter of 2021.
The Federal Reserve’s role
And several financial reviews of 2019 warned that stock market rises have largely been fueled by the Federal Reserve’s actions rather than underlying economic strength, though others dispute that.
The suggestion is that some investors see stocks as a one-way bet. If anything goes wrong (virus, economic slowdown … whatever), the Fed will ride to the rescue with lower interest rates and limitless stimulus packages. Indeed, on Monday, MarketWatch reported on a conference of economists that day at which delegates were already calling on the Fed to cut rates to head off the effects of the coronavirus.
This theory about stock market investors banking on the Fed to rescue them would certainly explain why major indexes are regularly hitting record highs amid so-so economic data and corporate results. On Feb. 16, CNN Business quoted Bleakley Advisory Group chief investment officer Peter Boockvar:
I think the stock market is just under this belief that no matter what comes our way the Fed is going to save us. I honestly believe it’s as simplistic as that.
But the Fed’s supply of metaphorical gas to maintain such momentum is running low — as is its willingness to use what’s left. That was confirmed on Jan. 29, following that month’s policy meeting. But, of course, Covid-19 might yet force it to change course.
Still, Fed-driven market growth later this year may be more modest than in 2019.
Don’t take forecasts too seriously
Just 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 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. Again, that was before Covid-19 became the threat we now perceive it to be. But 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?
Around New Year, it wasn’t hard to find experts who were predicting that mortgage rates could plumb new depths in 2020. And it looks as if they’re being proved right.
However, few of them predicted that a viral epidemic would be the cause of plunging rates. So their kudos is limited.
And we’re yet to see how Covid-19 will play out. What we do know is that mortgage rates are no longer tracking yields on 10-year Treasurys as closely they usually do. And that is muting the effects of volatility in wider markets.
And 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. Fannie’s and the MBA’s were published in February, but Freddie’s latest forecast came out in December:
| Forecaster | Q1 | Q2 | Q3 | Q4 |
| Fannie Mae | 3.5% | 3.4% | 3.4% | 3.4% |
| Freddie Mac | 3.8% | 3.8% | 3.8% | 3.8% |
| MBA | 3.6% | 3.7% | 3.7% | 3.7% |
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 signed a phase-one trade agreement with China’s Vice-Premier Liu He.
Although the White House remains proud of that deal, critics are less sure. They point to weaknesses that can’t be resolved until a phase-two deal. And one of those is unlikely until 2021.
Limited economic boost
Following its January poll of economists, Reuters chose to quote Janwillem Acket, who’s chief economist at Julius Baer, as representative of wider opinions:
The recent Phase 1 deal between the U.S. and China suggests decreasing odds of an escalation to a full-blown trade war. However, the deal so far is not comprehensive enough to significantly boost economic momentum.
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. And all that was before the coronavirus hit.
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 the timing of the pain and how it’s 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 to 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.
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 emerged during the World Economic Forum in Davos (Jan 21-24), which was attended by the president and other world leaders.
During the week of the forum, French officials suggested that a temporary trade truce had been agreed to allow for further talks. And, on Jan 22, hopes for a new US-EU trade agreement grew. That week, The Financial Times ran 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 (pre-virus) 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.
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, assuming an absence of earth-shattering news.
Of course, we’re keeping our eye on the Covid-19 coronavirus outbreak. And there might easily be a bounce if and when its risks are perceived to fade. Indeed, some loan officers are already recommending locking if you’re within 45 days of closing.
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.
Only you can decide
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.
