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Rate lock advice

My recommendation reflects the success so far of the Fed’s actions in keeping rates uberlow combined with relatively benign markets. 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. And you might wish to lock anyway on days when rates are at or near all-time lows.

The Fed may end up pushing down rates even further over the coming weeks, though that’s far from certain. And, separately, continuing bad news about COVID-19 could have a similar effect through markets. (Read on for specialist economists’ forecasts.) But you can expect bad patches when they rise.

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.

Important notes on today’s mortgage rates

That FHFA debacle

This is the story behind the sharp increases in mortgage rates on Aug 13 and 14. If you’re planning to refinance to a loan backed by Fannie Mae or Freddie Mac, you may have to pay more for the privilege. Because the Federal Housing Finance Agency, which regulates the two enterprises, has just imposed a new, additional closing cost.

Unless your loan closes before the end of this month, the FHFA will make you pay an additional 0.5% of the loan amount, supposedly to cover additional market risk. For a $200,000 loan, that’s $1,000 added to your closing costs (divide your loan amount by 200).

However, if you’ve already locked in your refinance but close after Aug 31, it may be the lender who picks up the tab. But mortgage companies often operate on wafer-thin margins. So they’ve passed on the cost — through higher mortgage rates — to new applicants (and those who are yet to lock) for all types of mortgages. Hence the higher mortgage rates all round following the announcement.

The industry is up in arms, not least over the suddenness of the announcement and implementation. And, on Aug. 13, some 20 bodies signed a joint statement condemning the FHFA’s move. Several US senators have also written to the regulator, requesting a rethink. If the federal agency caves, we could see rates fall sharply again. But you might not want to hold your breath.

The rate you’ll actually get

Naturally, few buying or refinancing will actually qualify for the lowest rates you’ll see bandied around in some media and lender ads. Those are typically available only to people with stellar credit scores, big down payments and robust finances (“top-tier borrowers,” in industry jargon). And, even then, the state in which you’re buying can affect your rate.

Still, prior to locking, everyone buying or refinancing typically stands to lose when rates rise or gain when they fall.

When movements are very small, many lenders don’t bother changing their rate cards. Instead, you might find you have to pay a little more or less on closing in compensation.

The future

Overall, we still think it possible that the Federal Reserve’s going to drive rates even lower over time. And, following the last meeting of its policy committee, the organization confirmed that it planned to maintain this strategy for as long as proves necessary. At a news conference, Fed chair Jay Powell promised:

We are committed to using our full range of tools to support our economy in this challenging environment.

However, there was a lot going on here, even before the green shoots of economic recovery began to emerge. There’s even more now. And, as we’ve already seen, the Fed can only influence some of the forces that affect mortgage rates some of the time. So nothing is assured.

What economists expect for mortgage rates

Mortgage rates forecasts for 2020

The only function of economic forecasting is to make astrology look respectable. — John Kenneth Galbraith, Harvard economist

Galbraith made a telling point about economists’ 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 financial 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.

The latest numbers

And here are their latest forecasts for the average rate for a 30-year, fixed-rate mortgage during each quarter (Q1, Q2 …) in 2020. Last week, Fannie and the MBA refreshed theirs. Freddie’s, which is now a quarterly report, was published in mid-June.

Last Monday’s update from Fannie included the prediction of a 2.9% average rate for the fourth quarter of this year. That was the first time we’ve seen a forecast from any of these organizations for a sub-3.0% rate during 2020.

Of course, none of these quarterly forecasts excludes daily or weekly averages below (or above) the levels they suggest during any quarter. After all, quarterly averages can include some quite sharp differences between highs and lows.

Fannie and the MBA were a bit more optimistic about rates in their August (monthly) forecasts. And that’s leaving Freddie’s June (quarterly) one looking stale.

What should you conclude from all this? That nobody’s sure about much but that wild optimism about the direction of mortgage rates might be misplaced.

Further ahead

The gap between forecasts is real and widens the further ahead forecasters look. So Fannie’s now expecting that rate to average 2.8% during the first quarter of next year and then inch down to 2.7% for the remainder of 2021.

Meanwhile, Freddie’s anticipating 3.2% throughout that year. And the MBA thinks it will be back up to 3.1% for the first three quarters of 2021 and then nudge up to 3.2% for the last. Indeed, the MBA reckons rates will average 3.6% during 2022. You pays yer money …

Still, all these forecasts show significantly lower rates this year and next than in 2019, when that particular one averaged 3.94%, according to Freddie Mac’s archives.

And never forget that last year had the fourth-lowest mortgage rates since records began. Better yet, this year may well deliver an all-time annual low — barring shocking news. Of course, shocking news is a low bar in 2020.

Mortgages tougher to get

The mortgage market is currently very messy. And some lenders are offering appreciably lower rates than others. When you’re borrowing big sums, such differences can add up to several thousands of dollars over a few years — more on larger loans and over longer periods.

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.

All this makes it even more important than usual that you shop widely for your mortgage and compare quotes from multiple lenders.

Economic worries

Mortgage rates traditionally improve (move lower) the worse the economic outlook. So where the economy is now and where it might go are relevant to rate watchers.

Last Wednesday’s release of the minutes of the July meeting of the Fed’s top policy committee (the Federal Open Market Committee or FOMC) made sobering reading. In particular, they contained concerns about the:

1. Uncertainty and long-term economic risks created by the pandemic
2. Expiration of additional federal benefits under the Cares Act “against the backdrop of a still-weak labor market”
3. Slowing of the initial recovery as earlier in the summer the coronavirus moved into previously unaffected parts of the country
4. Possibility of banks and other lenders soon tightening their lending criteria in ways that could “restrain the availability of credit to households and businesses”

Fed concerned about employment

Perhaps most worryingly, the minutes also said:

The projected rate of recovery in real GDP, and the pace of declines in the unemployment rate, over the second half of this year were expected to be somewhat less robust than in the previous forecast.

So the FOMC painted an unhappy picture. But it’s not the first time it’s done so. And markets seem adept at ignoring it — as long as it promises to keep shoveling money into the economy. It repeated just that promise in those minutes.

The president’s stimulus announcements

In an attempt to cut through the partisan logjam in Congress, President Donald Trump signed a number of executive orders and memorandums on Aug. 8. These were intended to provide an economic stimulus to counter the effects of the coronavirus pandemic.

Some hoped the president’s initiative might be a catalyst for legislators on Capitol Hill, who have failed to come up with their own, more sustainable stimulus package. But no. The Senate is now in recess until early September.

The impact of the executive orders is yet to become clear. There are certainly plenty of practical and possibly legal hurdles to be overcome before they deliver any tangible benefits. As The Washington Post observed last Saturday:

Just two weeks after President Donald Trump approved executive actions aimed at bypassing stalled stimulus negotiations with Congress, only one state has said it is paying new jobless benefits, few evictions have been paused, and leading employers have made clear that workers will not benefit from the president’s new payroll tax deferral.

Stimulus an urgent need

The threats to the economy that stem from the current Congressional deadlock are obvious. And you can see why the president sought to intervene.

There may be sound ideological and long-term economic reasons for discontinuing additional unemployment benefits. But, in the short term, that might impact millions, including those who don’t directly receive them.

Mass evictions and foreclosures in the rental sector are real possibilities, as is a widespread increase in food insecurity. And lenders (those who provide credit cards, personal loans, auto loans and so on, as well as mortgages) could see defaults, repossessions and foreclosures soar across broad population groups. As the Fed warns, that could see lenders cutting off many in the most need.

As importantly, some economists warn that letting the federal benefit lapse risks hitting consumer spending, something that could quickly affect the wider economy. On Aug. 3, The Financial Times had a headline, “US economy in peril as unemployment payments expire.”

COVID-19 still a huge threat

The COVID-19 pandemic and its economic implications are the single biggest influences on markets at the moment. And nationwide trends for new infections and deaths are looking encouraging.

But there remain plenty of states, cities, areas and neighborhoods that are hot spots with rising infections and deaths. And we’re not yet past seeing some shocking figures. The Aug. 12 national death toll was the highest on a single day since mid-May. And, on Aug 8, we saw the total number of infections surpass 5 million. Over the weekend, it likely surpassed 5.8 million.

In a White House virus briefing on July 21, President Donald Trump warned:

It will probably, unfortunately, get worse before it gets better. Something I don’t like saying about things, but that’s the way it is.

A second wave?

Now there are more grounds for concern. Several countries that seemed to have their outbreaks under control a couple of months ago (including South Korea, Spain, Germany, France and Italy) are experiencing new spikes in infections. As importantly, economic data out of Europe last week suggests this may be causing a slowing of the recovery there.

Is such a second wave the fate that awaits the United States and its economy after it winds down antivirus measures?

Domestic threat

Most important economic data have recently been looking good. But you need to see them in their wider context.

First, they follow disastrous lows. You expect record gains after record losses.

And, secondly, the pandemic is far from over, with some places still recording frightening numbers of new cases and deaths.

So, while good news is more than welcome, it can mask the devastation wreaked on the economy by COVID-19.

Worries

Some concerns that remain valid include:

1. We’re currently officially in recession
2. Unemployment is expected to remain elevated for the foreseeable future — In a blow, last Thursday’s unemployment figures were back above a million (1,106,000). The previous week’s new claims for unemployment insurance came in at 963,000, which everyone hoped was the start of a steadily improving trend. But that was the first time they’d fallen below the million mark in 20 weeks. And last week’s number may suggest it won’t be an easy, downhill ride
3. The first official estimate of gross domestic product during the second quarter showed an annualized contraction of 32.9%. When you look at the second quarter in isolation (not annualized), the fall in economic output was about 9.5% in those three months
4. On June 1, the Congressional Budget Office reduced its expectations of US growth over the period between 2020 and 2030. Compared with its forecast in January, the CBO now expects America to miss out on $7.9 trillion in growth over that decade

As International Monetary Fund (IMF) Chief Economist Gita Gopinath put it a while ago: “We are definitely not out of the woods. This is a crisis like no other and will have a recovery like no other.”

Third quarter GDP

Markets seem untethered from reality

And yet, in spite of all the above, on June 30, US stock markets celebrated the end of their best quarter for more than a decade — by some measures since 1987. Various record highs have been reached since, most recently last week when the S&P 500 and the Nasdaq Composite both attained all-time highs.

Many economists are warning that stock markets may be underestimating both the long-term economic impact of the pandemic and its unpredictability. And some fear that we’re currently in a bubble that can only bring more pain when it bursts.

Do you believe the line that markets look ahead and judge future rewards? Or do you take the view that they’re high because the Fed’s pumping money into corporate debt and yields are so low investors that have few other places into which to put their resources?

Economic reports this week

It’s quite an interesting week for economic reports. There’s the consumer confidence index on Tuesday. Thursday brings the second reading of second-quarter GDP (which will only cause a fuss if it’s very different from the first reading) and the weekly, initial jobless claims number. And Friday sees personal income and consumer spending, along with the consumer sentiment index.

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
• Tuesday: August consumer confidence index (forecast 93.0 index points) and July new home sales* (forecast 787,000 new homes sold)
• Wednesday: July durable goods orders (forecast +4.5%)
• Thursday: Q2 GDP revision* (forecast -32.5%). Plus weekly new jobless claims to August 22 (forecast 1.0 million new claims for unemployment insurance)
• Friday: July personal income (forecast -0.4%), consumer spending (forecast +1.5%) and core inflation (forecast +0.5%). Plus August consumer sentiment index (forecast 72.9 index points)

*These figures are seasonally adjusted annual rates (SAARs). In other words, they show what would happen were the data for the reported period replicated for 12 consecutive months or four consecutive quarters. It sounds weird but it can be a useful measure, providing you understand what you’re looking at