Forecast plus what’s driving mortgage rates today

Average mortgage rates soared yesterday. Our prediction was correct about the direction but not the extent of the movement. You now have to go back to Feb. 24 to find a higher rate, meaning all the gains made since then were wiped out in a single day. Still, bear in mind current rates remain uberlow by any standards.

With luck, yesterday’s rise will at least begin to normalize demand for mortgages and refinances, which has recently has become too great for lenders and investors. In time, the link between mortgage rates and other markets might reinstate itself. But, for now, we may continue to see those rates mainly determined by the factors we describe in the first three sections of “This week,” below.

» Related: How to buy a house with $0 down in 2020: First time buyer

So, given that lenders are still facing demand issues, we may well see mortgage rates today rising again, in spite of many markets acting in rate-friendly ways. However, as always, events may overtake that prediction.

» MORE: Learn About No Down Payment Mortgage Options

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

First thing this morning, markets (or, rather, other factors) looked set to deliver mortgage rates today that are higher. By approaching 10 a.m. (ET), the data, compared with roughly the same time yesterday morning, were:

• Major stock indexes were falling precipitously. (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 nudged higher to $1,662 an ounce from $1,656. (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
• Oil prices barely moved lower to $33.35 a barrel from $33.36 (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 increased to 0.69% from 0.65%. A year ago, it was at 2.64%. (Bad for mortgage rates.) More than any other market, mortgage rates tend to follow these particular Treasury bond yields
•  CNN Business Fear & Greed index held steady at 4 out of a possible 100 points. A month ago, it stood at 57. (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

If mortgage lenders were increasing rates even on days like Monday (which was disastrous for most markets), they may do so again today.

This week

Why mortgage rates are untethered from other markets

We’re usually quietly proud of our record for predicting the day’s changes in average mortgage rates. But recently, our forecasts have been less accurate. Why’s that?

Well, we can only base our predictions on what’s happening in other markets with which mortgage rates traditionally have more or less close relationships. But those relationships have become untethered recently.

That’s not wholly surprising amid the sort of volatility we’ve been seeing recently. But it’s more than that. Last Friday and Monday were only the most recent examples of key markets acting in extremely mortgage-rate-friendly ways — yet those rates still rising. And yesterday’s rise was much sharper than you’d expect, given other markets’ performances. So what’s going on?

Lenders overwhelmed

The Mortgage Bankers Association reckons refinance applications during the last week of February were more than twice as numerous than (up 224% on) the same week a year earlier. And that sort of growth has been going on for a while now.

So some lenders simply lack the skilled professionals to process all the applications they’re receiving. On Monday, senior originator Ted Rood told Mortgage News Daily, ” … some lenders are not accepting new loans or locks, and lock pricing engines are crashing repeatedly due to excessive volume.”

And all lenders — even those with all-online offers and scalable IT infrastructures that can get them over that administrative hurdle — face two other problems.

Supply and demand

First, the standard mortgage lending model sees loans bundled up into bond-like financial instruments (mortgage-backed securities — MBSs) and sold on a secondary market soon after closing. But investors are loath to buy them (something that pushes up rates) because they currently see MBSs as a bad bet.

That’s because the current wave of refinances means they’re getting a much lower return on MBSs acquired in recent years than normal. They don’t expect many 30-year mortgages to actually last 30 years. But they do rely on them lasting several. And those now being refinanced after just a few months or a year or two deliver lower profits or even losses.

And the second reason rates are untethered from other markets concerns cash flow. Lenders need to have cash reserves to fund each closing and get them through until they sell the MBS. And those finite reserves are stretched by sudden and unexpectedly high demand, while adding to them takes time. So those lenders have to manage demand for their products (mortgages) in order to match supply (money for closings).

And you don’t need to have attended even Economics 101 to know that the fastest way to manage excessive demand for a product is to raise (or at least moderate) its price.

Virus still the biggest factor for mortgage rates

The Wuhan coronavirus (Covid-19, standing for Coronavirus disease 2019) was certainly behind the chaos seen in global markets since Feb. 20. Even Monday’s mayhem, which was triggered by a squabble between Russia and Saudi Arabia over oil prices, was virus-related. The low oil prices that created the row are low because of it.

The virus now has a confirmed presence on five continents and in 120 countries, up from 115 yesterday. Here at home, the US has broken the 1,000 barrier, with 1,016 cases, up from 729 yesterday. And that American number may be much higher in reality: A shortage of kits and the cost to uninsured patients of testing means many cases must surely go unconfirmed.

China, Italy, Iran, South Korea, Spain, France, Germany, Japan (including the cruise ship harbored in Yokohama, Japan) and now the United States each has confirmed infections in the thousands or tens of thousands. And 14 other countries and territories have them in the hundreds. China, Japan, Italy, France, Germany and the US comprise a majority of the world’s top-10 economies, including all the top-4. Meanwhile, South Korea occupies the No. 11 slot and Spain the No. 13 one.

While markets are made up of people who share the fear and empathy of the rest of humanity, their focus isn’t directly on Covid-19’s health implications. Their concern is the virus’s economic consequences, which are a byproduct of the medical ones.

Worldwide worries

Data suggest those economic consequences are likely to turn out to be severe. Yesterday, the Italian government announced that it had implemented a strict quarantine on all 60 million of its residents. The implications for Italy’s economy boggle the mind.

Meanwhile, last Friday, a poll by Reuters of economists based in China found:

The coronavirus likely halved China’s economic growth in the current quarter compared with the previous three months, more severe than thought just three weeks ago and triggering expectations for earlier interest rate cuts.

And, already, several other governments and central banks are forecasting reduced gross domestic product (GDP) growth for their economies. Indeed, last Monday, the Organization for Economic Cooperation and Development (OECD) slashed its 2020 global growth forecasts to 1.5%, almost half the 2.9% it was expecting before Covid-19 took hold. It also warned that the virus could “plunge several countries into recession this year,” according to The Guardian.

Meanwhile, other threats aren’t as immediately apparent. For example, very low oil prices globally are likely to place some American oil companies under severe financial strain. But some of those are highly leveraged (have borrowed less than prudently) and face collapse if prices don’t soon recover. And such extensive bankruptcies could have further consequences for those who lent to them.

The dangers of global connectedness

Globalization has brought much more sophisticated and diverse supply chains. So, for instance, if you want to build a car in America, you’ll likely rely on parts from several other nations. And that means you’ll be vulnerable to any disruption in those other countries.

As long ago as 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.

But it’s not just China. If global reliance on it for intermediate goods is 20%, the rest of the world accounts for 80%. And, as worryingly, some supply chains are so sophisticated that manufacturers may not realize the ultimate source of essential parts. Monday’s Financial Times reported, “Many companies are unaware that they are exposed to parts shortages because of outbreak.”

Central banks face problems

Traditionally, central banks intervene during troubled times to prop up their economies. And it seems certain most important ones will do so in response to Covid-19. The Bank of Japan and the European Central Bank (ECB) have signaled in recent days a willingness to act, presumably with rate cuts. And the Bank of England implemented a half-point cut overnight.

But when the Federal Reserve did the same last Tuesday, markets responded badly to a shock cut in interest rates. They seemed to suspect that it was acting precipitously. Was it bending to political pressure from the White House or was it overreacting to stock market falls? More scarily yet, did it know things that investors didn’t?

That suggests central banks will have to tread warily when intervening. But few of them have much room to maneuver anyway. They already have exceptionally low rates (the ECB’s is currently -0.5% — yes, a negative rate) so are limited in their use of that traditional stimulus tool. And quantitative easing (sometimes compared to printing money) brings its own dangers.

Some economists have been warning for years about the dangers of keeping interest rates artificially low during times of good economic growth. They feared that would limit options when the next recession loomed. We may be about to discover whether they were right. And, if so, the extent to which their fears were justified.

Covid-19 likely to spread within US

The Centers for Disease Control and Prevention (CDC) warned on Feb. 23 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.

After originally playing down the virus’s threat to health, President Donald Trump on Monday acknowledged that its economic dangers were all too real. At a White House press briefing, he told reporters of plans to limit damage to the economy. And he said:

We have a very strong economy, but this blindsided the world.

Ideas currently being floated by the administration include delaying the tax payment deadline and cutting payroll taxes. And the president plans to meet with a group of Wall Street CEOs to discuss the crisis later today.

How scary are the health implications?

Overnight figures show Covid-19 has been confirmed in 121,508 (up from 116,246 yesterday) cases around the world, and has killed 4,383 (up from yesterday’s 4,089). 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 (3.6%) so far among those infected than that of either SARS (nearly 10%) or MERS (35%).

And that crude death rate calculation is almost certainly too high. Some experts are predicting a final mortality rate of around 1%. But it’s too soon to make definitive judgments.

However, earlier today German Chancellor Angela Merkel said she expected 70% of all Germans to eventually be infected by Covid-19. That’s not too far off the UK government’s March 3 forecast of 80% for its population.

If those projections turn out to be roughly correct and that infection rate occurs globally, the coronavirus’s final toll could be enormous, even with a 1% mortality rate. If 75% of the world’s population (7.7 billion people) becomes infected and 1% of those die, that’s 58 million deaths.

More market volatility ahead?

In coming days and weeks, volatility will likely be driven by changing news cycles. But such news isn’t always reliable.

Scientists are still trying to reach a consensus over many medical aspects of the virus. And 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. For example, some remain suspicious of China’s and Iran’s numbers.

So markets that bend with every passing news cycle may turn out to be “lively,” to say the least. But the extent to which those movements might affect mortgage rates is unclear. Because, for now, it seems not to be markets that are determining those rates.

Economic reports this week

It’s a relatively quiet week for domestic economic reports. But given that, in recent weeks, even seriously important ones have failed to cut through investors’ obsession with Covid-19, that may make little difference.

Unless the coronavirus magically disappears during the next few days, expect none of this week’s reports to make much difference to mortgage rates. The ones that more normally might have done so include Wednesday’s consumer price index (CPI) and Friday’s consumer sentiment index.

But, 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: Nothing
• Wednesday: February consumer price index (actual +0.1%; forecast 0.0%) and core CPI* (actual +0.2%; forecast +0.2%)
• Thursday: February producer price index (forecast -0.1%)
• Friday: March consumer sentiment index (forecast 95.0 index points)

*Core CPI is the CPI with food and energy prices, which can be volatile, stripped out.