Forecast plus what’s driving mortgage rates today

Average mortgage rates hit a new all-time low last Friday. That doesn’t mean that your own loan will necessarily have reached that point. But, overall, top-tier borrowers wanting the right type of mortgage should now be popping Champagne corks.

Please don’t think this means that those rates are set on an inevitable downward path. True, it’s probably slightly more likely, in my view, that they’ll continue on down over time. But it would be no surprise at all if they were to bounce back up (quite possibly today), at least for a while.

In other words, if you’ve several weeks to go before you have to lock, you might yet see lower rates. But, if you’re getting close to having to lock, you have to decide whether the risk of continuing to float your rate is worth it.

Yes, we think it likely that the Fed’s going to drive rates lower over time. 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 last Friday morning, were:

• Major stock indexes soared 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 nudged lower to $1,748 an ounce from $1,751. (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 $32.87 a barrel from $28.70 (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 jumped to 0.68% from 0.62%. A year ago, it was at 2.40%. (Bad 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 moved higher to 48 from 38 out of a possible 100 points. (Bad 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 that day. But 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 Monday, 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. And that might see some mortgages being offered at sub-3% rates sooner than most expect.

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 three weeks, the numbers of new applications for refinancings were respectively 225%, 218% and 210% higher than the same week one year earlier. And the latest data, published last Wednesday for the week ending May 8, showed that figure to still be 201% 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.

Last Monday, the MBA said it reckoned the percentage of mortgage loans already in forbearance was 7.91% on May 3, up from 7.54% a week earlier. That latest figure likely represented nearly 4 million homeowning households with mortgages currently in forbearance plans. And Black Knight’s more recent report, for May 12, is even worse: It puts the number of households in forbearance at 4.7 million.

All 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 36 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 have already seen higher rates that are unconnected with MBS prices.

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. Meanwhile, many are putting restrictions on their loans. And 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. So shopping around for your loan or refinance is even more important than usual.

On May 7, the MBA revealed the extent to which spooked lenders are tightening their credit requirements. Its Mortgage Credit Availability Index (MCAI) fell by 12.2% in April. And Joel Kan, an economist and MBA associate vice president, explained:

The overall index fell to its lowest level since December 2014, and the subindexes pointed to tightened credit supply for all loan types. The decline was largely driven by lenders dropping many low credit score and high-LTV* programs, as well as further reduction in jumbo … products.

* LTV stands for loan-to-value ratio and determines how big a down payment you need. The higher the LTV, the less you have to put down.

An economist writes …

Back in mid-March, 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 May 15, the MBA’s economists forecast 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.

And 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% throughout 2021.

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

Economic worries

Domestic threat

April 29’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.

More conservatively, on May 8, the Federal Reserve Bank of Atlanta’s running GDP estimate put real GDP growth for the current quarter at -34.9%.

May 8’s official data 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.

And Goldman Sachs is forecasting much worse unemployment. It’s expecting a 25% rate at the peak.

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 other shapes are available. Somes 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. Last Monday’s Wall Street Journal ran the headline, “Why the Economic Recovery Will Be More of a ‘Swoosh’ Than V-Shaped.”

And yesterday, Fed Chair Jay Powell seemed to support the Swoosh camp when he appeared on “60 Minutes.” Referring to the recovery, he told the show’s viewers, “It may take a period of time; it could stretch through the end of next year. We really don’t know.”

Global threat

On May 8, the Bank of England (the UK’s central bank and its equivalent of our Fed) issued a strikingly ominous warning. It said that, according to one plausible model, this wouldn’t just be the worst economic slump in Britain since the Great Recession (2007-09). Nor even the worst since the Great Depression (1929-33). It would be the worst since 1706 when the War of the Spanish Succession was raging.

And such mayhem looks unlikely to be confined to Europe. On April 14, the World Bank updated its 2020 global projections:

… we project global growth in 2020 to fall to -3 percent. This is a downgrade of 6.3 percentage points from January 2020, a major revision over a very short period. This makes the Great Lockdown the worst recession since the Great Depression, and far worse than the Global Financial Crisis.

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 confusing given that, on May 1, analytics firm FactSet calculated that the decline in earnings for S&P 500 companies during the first quarter was -13.7%.

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 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. Yes, maybe Wall Street expectations of one will be proved right. But an increasing number of economists doubt it.

And 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

It’s a very light week for economic reports. Not that that’s likely to affect markets. They’ve been unmoved by seriously important ones recently.

Indeed, the items on this week’s calendar most likely to attract investors’ attention aren’t economic reports at all. First comes the virtual testimony on Tuesday before Senate Banking Committee of Fed Chair Jay Powell, and Treasury Secretary Steven Mnuchin.

And secondly is the publication of the minutes of the last meeting of the Federal Open Market Committee (FOMC). That’s the Fed policy committee that sets that organization’s interest rates. So investors always pore over these minutes.

So it would be a surprise if reality suddenly intruded in coming days.

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

MarketWatch is yet to publish this week’s analysts’ forecasts. So we will replace the TBAs (“to be advised”) below when it does; with luck, tomorrow. This week’s calendar of important, domestic economic reports comprises:

• Monday: Nothing
• Tuesday: April housing starts (forecast TBA) and building permits (forecast TBA). Also Fed Chair Jay Powell, and Treasury Secretary Steven Mnuchin testify at a virtual hearing of the Senate Banking Committee
• Wednesday: Nothing
• Thursday: Weekly jobless claims to May 16 (forecast TBA). Plus April’s exiting home sales (forecast TBA) and leading economic indicators (forecast TBA)
• Friday: Nothing

Might any of this week’s reports on economic reality catch investors’ attention? Seems unlikely.