Forecast plus what’s driving mortgage rates today

Average mortgage rates nudged upward again yesterday. That means it’s been a week since they last fell. But don’t panic — yet. Thursday’s average would have been seen as a dream all-time low before May 15.

Still, the last week’s been a reminder that mortgage rates aren’t in the downward phase of a smooth and consistent trajectory. True, we hope to see further falls. But those are likely to be punctuated by unpredictable rises, some of which could be sustained and perhaps occasionally sharp.

Important notes on today’s mortgage rates

Naturally, few buying or refinancing will actually qualify for the uberlow rates you’ll see bandied around in some media. Those are typically available only to people with stellar credit scores, big down payments and robust finances (so-called top-tier borrowers).

Still, recent drops should mean that most who are in the process of borrowing will get a lower rate than the one they were looking at last Tuesday. And that still applies today.

Overall, we think it likely that the Federal Reserve’s going to drive rates even lower over time. However, there’s a lot going on here. And, as we’ve recently seen, the Fed can only influence some of the forces that affect mortgage rates some of the time. 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 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 mixed. (Neutral 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 inched up to $1,744 an ounce from $1,742. (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 nudged higher to $33.02 a barrel from $32.53 (Neutral 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 edged down to 0.67% from 0.70%. A year ago, it was at 2.23%. (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 held steady at 52 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

Time was when we could use those markets to fairly confidently predict what would happen to mortgage rates on any given day. But those rates are for now divorced from those markets — and those markets are untethered from reality.

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 — explanation coming up). For now, there would be no limit on how much it would spend buying these.

On May 12, for example, the Federal Reserve Bank of New York purchased $240 million of mortgage bonds with a “coupon” (yield, well, sort of) of 2%, according to Bloomberg. The Fed said more buying was imminent.

We’ve been saying since then that might see some mortgages being offered at sub-3% rates sooner than most expected. And, sure enough, a few already have been.

What a mortgage-backed security is

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

So how come 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). Over a recent five-week period, the numbers of new applications each week for refinancings was consistently more than twice as high as the same week one year earlier. For the week ending May 15, it was “only” 160% higher. And Wednesday’s data, for May 22, showed that figure to be moving up again: 176% higher than the same period in 2019. Yes, demand may be easing. But only slowly and unevenly.

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, many are 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, with so many competing pressures, don’t expect a smooth ride.

Fly meets ointment

However, there’s another issue that’s been 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.

Research firm Black Knight reckons that, by May 19, 4.75 million households with mortgages were in forbearance. That’s 9% of all mortgages. And it adds up to “a little over $1 trillion in unpaid principal,” according to the company. (Except for interest-only loans, mortgage payments are made up of interest and principal, with the latter being the amount by which you reduce your mortgage balance each month.)

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.

If you’re experiencing difficulties paying your mortgage, and your loan is owned by Fannie Mae or Freddie Mac, their websites now have tools and resources to help you. Fannie’s is Here to Help and Freddie’s is MyHome.

Possible removal of fly

That problem’s likely to get only worse as unemployment and underemployment soar. Already, COVID-19 has caused more than 40.7 million Americans to lose their jobs. And some suspect even that’s an undercount as bureaucrats struggle with backlogs.

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. And they may be beginning to work. On May 18, Inside Mortgage Finance magazine noted:

Is it just us or has anyone noticed that the cries to assist nonbanks with their MBS payments have subsided, at least for now? Credit Ginnie Mae and its Pass-Through Assistance Program and the Federal Housing Finance Agency’s announcement that the GSEs [government-sponsored enterprises Fannie Mae and Freddie Mac] will take over MBS remittance obligations after four months, if need be …

Higher rates that are unconnected to MBS prices

But another supply issue also happens further down the mortgage production line than where the Fed is tinkering — and than where higher prices mean lower yields and rates.

Lenders who can’t cope with sudden tsunamis of demand try to manage their workloads by deterring would-be borrowers through higher rates. And, in this way, we may have already seen higher rates that are unconnected with MBS prices.

The recent record low and continuing uberlow rates might trigger another such tsunami.

You can now understand why we said there’s a lot going on here.

Mortgages tougher to get

It’s all 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.

In its Mortgage Credit Availability Index (MCAI) for April, the MBA revealed just how much spooked lenders were tightening their credit requirements. That index fell by 12.2% that month.

More recently, there have been signs that lenders are relaxing their credit restrictions a little. It seems they think they’re getting a feel for the impact the coronavirus will have on their businesses. But it remains even more important than usual to shop around for your loan or refinance.

What economists expect for mortgage rates

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.”

Indeed, some top-tier borrowers of 30-year, fixed-rate mortgages have already been able to find rates that begin with a 2. But those remain rare.

Of course, not all experts share Hale’s view. In their latest forecast, published on May 15, the MBA’s economists predicted that the rate for a 30-year, fixed-rate mortgage would average 3.4% for the rest of this year. OK, that’s better than they thought in April. But it’s among the less optimistic forecasts.

Fannie Mae and Freddie Mac 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% for the whole of 2021.

What should you conclude from this? That nobody’s sure about much.

Economic worries

Domestic threat

First quarter gross domestic product (GDP) fell by 5.0%, according to official figures, updated yesterday. But things are looking way worse for the current quarter (April 1-June 30).

Indeed, on May 19, the Federal Reserve Bank of Atlanta’s running GDP estimate put its worst-case real GDP growth forecast for the current quarter at -41.9%.

Meanwhile, May 8’s official employment situation report showed April’s unemployment rate soaring to 14.7%, up from 3.5% in February. And, at 20.5 million, the total number of jobs lost in April was a record. Indeed, it was more than twice as many in that one month than the 8.7 million that disappeared throughout the Great Recession.

But, in mid-May, Goldman Sachs forecast much worse unemployment. It’s expecting a 25% rate at the peak. And on May 22, JPMorgan Chase predicted an unemployment rate of at least 10% through the first quarter of 2021.

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

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. But Monday’s Financial Times included the headline, “Just one in 10 fund managers expect V-shaped recovery for US economy.”

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. 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. 

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 the S&P 500 stock index was up nearly 13% in April, its best monthly performance in 33 years.

That’s especially troubling given that, on May 1, analytics firm FactSet calculated that earnings for S&P 500 companies during the first quarter were down -13.7% — the worst fall since 2009. And the company expects worse to come: a fall of 43% in the current quarter and of 25% in the next.

Wednesday’s New York Times noted, “By some measures, stocks are as expensive, relative to earnings, as they were in the heady dot-com days.”

And, on May 15, The New Yorker ran a headline that posed a question many are asking:

Have the Record Number of Investors in the Stock Market Lost Their Minds?

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 could force the administration and Congress to pump in yet more money.

However, this strategy’s success depends on a very quick economic recovery (a V-shaped recession) once the COVID-19 threat dissipates. And that may not be as likely as investors seem to think. Perhaps a more likely explanation for stock market performances is that investors simply have few other profitable places to put their money.

But you may wonder whether investors should be betting so big on so many unknowable variables. Meanwhile, we’ll continue to say they’re untethered from reality.

Economic reports this week

That last section explains why markets have for months ignored pretty much all the terrible figures contained in domestic economic reports. When it comes to news, if it doesn’t fit their happy mindset, it’s not worth reading.

So you’d be right not to have expected much or any reaction to this week’s important reports, which include today’s data on personal income, consumer spending and core inflation. The others that markets ought to have noted were for consumer confidence (Tuesday) and consumer sentiment (today).

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 — Markets closed for Memorial Day
• Tuesday: April new home sales (actual 623,000 new homes sold at an annualized rate; forecast 480,000). May consumer confidence index (actual 86.6 index points; forecast 86.8).
• Wednesday: Nothing. However, the Fed releases its Beige Book* at 2 p.m. (ET).
• Thursday: Weekly jobless claims to May 23 (actual 2.12 million new claims; forecast 2.14 million). Plus April’s durable goods orders (actual -17.2%; forecast -18.2%). Also, the second (of three) estimates of gross domestic product for the first quarter of this year (actual -5.0%; forecast -4.8%)
• Friday: April personal income (actual +10.5%; forecast -2.1%), consumer spending (actual -13.6%; forecast -13.0%) and core inflation (actual -0.4%; forecast -0.3%). Plus May’s consumer sentiment index (actual 72.3 index points; forecast 73.4)

*The Fed describes its Beige Book thus: “Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources.”