Forecast plus what’s driving mortgage rates today

Average mortgage rates held steady yesterday. That leaves them back where they were last Monday. And it means they haven’t fallen in a week. Still, they remain in a very good place indeed by any standards.

It would be no surprise at all if they fell a little today. Their overall trend was downward during April and we hope that might resume and continue. But nothing’s predictable in the current crisis. So another rise or holding steady shouldn’t raise a single eyebrow.

Meanwhile, little’s changed. And we remain optimistic that, overall, the Federal Reserve (which, as you’ll discover below, is currently intervening decisively in the market for mortgage bonds) 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. And expect some rises along the way. Read “How the Fed’s helping mortgage rates,” below, to explore the essential details.

Market data affecting (or not) today’s mortgage rates

We can still see little relationship between mortgage rates today and activity in the markets they usually follow. So we’re publishing the following only in the hope you have insights that we’re missing. Here’s the state of play this morning at about 9:50 a.m. (ET). The data, compared with roughly the same time yesterday morning, were:

• Major stock indexes were appreciably 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 held steady at $1,699 an ounce. (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 rose to $26.17 a barrel from $23.42 (Bad 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 nudged down to 0.69% from 0.72%. A year ago, it was at 3.2%. (Good 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 inched lower to 42 from 43 out of a possible 100 points. (Neutral 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 the above markets — and those 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

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 further over the coming weeks, though that’s far from certain. And you can expect bad patches.

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.

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. For a sustained period, it was buying assets (so not just MBSs) at a rate of $1 million every second.

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.

How Fed affects mortgage rates

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 gigantic new buyer in this secondary market, it should generate increased demand that raises MBS prices and so creates lower yields for investors — and lower mortgage rates for you.

So that’s the theory. But we’ve seen a lot of those crumble to dust in recent months. 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 refinances.

Since late in March, refinances have been elevated, according to the Mortgage Bankers Association (MBA). In the previous two weeks, the numbers of new applications for refinancings were respectively 225% and 218% higher than the same week one year earlier. And yesterday’s MBA data, for the week ending May 1, showed the latest iteration of that figure to still be 210% up on the same period in 2019. This may show an easing, but it’s a very slow one.

So no surprises there. As you’d expect, current, 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 mathematical certainty that lower bond prices mean 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

However, there’s another issue in play. Lenders that aren’t banks face cash flow problems arising from the pandemic. Millions of homeowners are already unable to make their monthly mortgage payments in full.

On Monday, the Mortgage Bankers Association published a news release. And it reckoned the percentage of mortgage loans in forbearance was 7.54% on April 26, up from 6.99% a week earlier. That latest figure likely represented 3.80 million homeowners needing help so far.

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

Possible removal of fly

That problem’s likely to get only worse as unemployment and underemployment soar. Already, COVID-19 has caused more than 33 million Americans to lose their jobs.

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 to future borrowers. And that would see the supply of new mortgages diminish.

Toward the end of April, the Federal Housing Finance Agency (FHFA) announced two initiatives that might assist non-bank lenders. But it’s unclear just how helpful those will be.

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 occasionally 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 when you’re planning for the future.

For example, in their latest figures, published on April 2, the MBA’s economists forecast that the rate for a 30-year, fixed-rate mortgage would average 3.6% between now and the start of October. And that’s 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 11 weeks.

COVID-19 hitting biggest economies hardest

Of the world’s top-10 economies, six (America, Italy, the UK, France, Germany and Brazil) now count their infections in the hundreds of thousands — except the US, which has passed the 1 million mark. All the other four count them in the tens of thousands. Spain, Russia and Turkey all have infections of 100,000+ but are top-20 rather than top-10 economies. Iran comes 25th in GDP rankings.

Of course, no country has sufficient testing to accurately record its actual infection and death rates. And some are less competent than others at compiling data. But some may also be manipulating them for political purposes. So it’s perfectly possible that more than six 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

Domestic threat

Last Wednesday’s official gross domestic product (GDP) figure showed the US economy contracting at a rate of 4.8% during the first quarter of this year. And research firm Capital Economics revealed on April 24 its expectations for the second quarter. Those are of a whopping 40% contraction between April 1 and June 30.

Meanwhile, today’s figures for new claims for unemployment insurance show 33.2 million Americans are newly unemployed since the coronavirus took hold. Tomorrow’s monthly employment situation report is expected to be similarly devastating, with economists forecasting a 15% unemployment rate.

A recession of some sort seems inescapable. But what will it look like?

What shape will a recession take?

We’re clearly in for at least a serious recession. And now economists are squabbling about the shape (if you pictured it on a graph) that might take.

For a while, a V-shaped one (sharp dip and sharp recovery) was favorite. Some think a W more likely, especially if there’s a second wave of coronavirus infections following the early ending of lockdowns. Others fear an L: a precipitous fall and no recovery.

A “Nike swoosh” (based on that company’s famous logo) is gaining popularity. That’s a sharp drop followed by a gradual recovery.

Global threat

Overnight, the Bank of England (the UK’s central bank and its equivalent of our Fed) issued a strikingly ominous warning. It said that, if things were to go as badly as they might, this wouldn’t just be the worst economic slump since the Great Recession (2007-09). Nor even the worst since the Great Depression (1929-33). It would be the worst since the War of Spanish Succession in 1706.

And such mayhem looks unlikely to be confined to Europe. On April 14, the International Monetary Fund (IMF) issued a dire warning. It predicted that most countries’ economies (and the whole global economy) would be 5% smaller next year than they were before the pandemic. And that assumed a sharp recovery in 2021, which is far from certain.

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 The Financial Times on April 20 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 NASDAQ Composite index was this morning higher than it was a year ago.

Or how come the S&P 500 stock index was up nearly 13% in April, its best monthly performance in 33 years. That’s especially confusing given that, on May 1, analytics firm FactSet found that the decline in earnings for S&P 500 companies during the first quarter was -13.7%.

So how can investors, analysts and traders be embarking on what’s likely to be the worst economic jolt in close to a century (maybe longer) with such stars in their eyes?

Sly like a fox? Or not?

On April 10, The New York Times offered a possible explanation for markets’ apparent break from reality. Investors see the same death tolls, GDP forecasts, unemployment numbers and company earnings results as the rest of us.

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, even though many economists doubt it.

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

You can pretty much forget domestic economic reports that cover March or the first quarter of this year. The effects of COVID-19 were much lower during those periods. And the figures they present are no more relevant to today’s economy than ancient history.

But, as we suggested in the previous sections, markets seem determined to go their own way, no matter what the real world is doing. So they may shrug off many of this week’s April reports, too.

And there are a couple on this week’s calendar that would normally demand investors’ close attention, including Tuesday’s Institute for Supply Management (ISM) nonmanufacturing index and Friday’s official employment situation report. Will markets react to these? Don’t hold your breath.

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: March factory orders (actual -10.3%; forecast -9.9%)
• Tuesday: April ISM nonmanufacturing index (actual 41.80%; forecast 40.0%)
• Wednesday: Nothing
• Thursday: Weekly jobless claims to May 2 (actual 3.2 million new claims; forecast 3.1 million new claims). First quarter productivity (actual -2.5%; forecast -5.8%) and unit labor costs (actual +4.8%; forecast +5.5%)
• Friday: April employment situation report, including nonfarm payrolls (forecast -22.0 million jobs), unemployment rate (forecast 15.0%) and average hourly earnings (forecast 0.8%)

That employment situation report used to be among the most important regular publications. Will markets ignore it now?