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Important notes on today’s mortgage rates

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 (so-called top-tier borrowers). And, even then, the state in which you’re buying can affect your rate.

Still, prior to locking, everyone buying or refinancing 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.

Overall, we still think it possible that the Federal Reserve’s going to drive rates even lower over time. 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 recently seen, the Fed can only influence some of the forces that affect mortgage rates some of the time. So nothing is assured.

Read “How the Fed’s helping mortgage rates,” below, to explore the essential details of that organization’s role in the mortgage market.

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 even further over the coming weeks, though that’s far from certain. (Read on for specialist economists’ forecasts.) And 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.

What economists expect for mortgage rates

The last couple of weeks may have changed a lot of economists’ expectations. Pretty much everyone was shocked by much better-than-expected employment figures on June 5 and retail sales yesterday. But many were sobered by the Federal Reserve’s worrying forecasts for economic growth and employment last Wednesday.

It’s too soon to say that those have transformed the economic landscape. But read the following with the knowledge that some of the forecasts cited were made well before either of those events. And never forget:

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

Looking good … to most

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.”

And she’s already been proved right. But, of course, not all experts share Hale’s rosy view, at least over the medium term. Indeed, her own publication, Realtor.com, said over the weekend that it thought rates could soon rise above their then-current sub-3% level.

And, in their latest forecast, published on May 15, the Mortgage Bankers Association’s (MBA’s) economists predicted that the rate for a 30-year, fixed-rate mortgage would average 3.4% for the rest of this year. Yesterday, Freddie Mac updated its forecast. It expects an average 3.4% rate for those loans this quarter and then 3.3% for the rest of 2020.

Mortgage rates forecasts for 2020

Earlier, we reminded you of the late John Kenneth Galbraith’s warning not to take economists’ forecasts too seriously. 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 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 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. Freddie’s (now a quarterly report, so less responsive to rapidly unfolding events) were published yesterday. The MBA’s came out in mid-May. And Fannie’s were released on Monday:

So suddenly, Fannie Mae’s optimism is the outlier. And nobody’s expecting a quarterly average below the 3.0% mark this year.

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

Further ahead

The gap between forecasts is real and widens the further ahead forecasters look. So Fannie’s now expecting that rate to average 2.9% throughout next year, while Freddie’s anticipating 3.2%. And the MBA thinks it will be back up to 3.5% for the last half of 2021. Indeed, the MBA reckons it will average 3.7% 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.

Mortgages tougher to get

The mortgage market is currently 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.

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

That credit tightening in figures

The Mortgage Lender Sentiment Survey, published by Fannie Mae last Thursday, suggests that problem continues. Its survey of lenders found, “the net share of lenders reporting easing credit standards for both the prior three months and the next three months significantly decreased, reaching survey lows.”

And, 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.

In the MBA’s May report, published last Tuesday, the index fell again, but less sharply: by 3.1%. However, it’s important to recognize that any fall represents a tightening in the credit standards lenders use. So things may not be getting worse as quickly as they were but they’re still getting a little worse.

However, some see some light in this gloom. When last week National Mortgage Professional magazine hosted an expert panel discussion about mortgages for those with “credit issues in the past such as foreclosures, bankruptcy, late payments or other isolated credit issues,” there were participants who expected a resurgence in activity soon.

Economic worries

Domestic threat

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.

Recent economic data has been looking good. For example, the latest employment and retail sales numbers have been way better than most economists expected. 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 states 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. On June 16, the Federal Reserve Bank of Atlanta’s GDPNow running resource put real GDP growth forecast for the current quarter at -45.4% (yes, that a minus)
3. 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

Not only are we not yet out of the woods, but we may still have no clue where their boundaries are located.

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. Indeed, they may well be preening themselves following the latest employment report.

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

But on May 29, The New York Times urged everyone to “Forget swooshes and Vs. The economy’s future is a question mark.” By which it meant, quit squabbling because nobody has a clue.

Markets seem untethered from reality — or not?

We’ve recently been accusing markets (or the investors who make them up) of being untethered from reality. And we’ve been quoting a May 15 headline in The New Yorker: “Have the Record Number of Investors in the Stock Market Lost Their Minds?”

Yesterday, Nobel-prizewinning economist Paul Krugman wrote this for The New York Times:

What are these investors thinking? I don’t think they are thinking — not really. The conventions of financial reporting more or less require that articles about market action ascribe rationality to investors, so stock movements are attributed to optimism about economic recovery, or something. But the reality is that we’re largely talking about young men, many with a background in sports betting, who have started buying stocks and are bullish because they’ve made money so far.

On June 14, CNN Business reported that just one online brokerage, TD Ameritrade, had opened 608,000 new accounts during the first quarter of this year. That was more than double the number in the previous quarter. Some, such as Krugman, see this as a response to lockdown, with inexperienced and unknowledgeable amateur investors piling into a high-risk environment.

Economic reports this week

Recently, markets have shrugged off economic reports that contain bad news and have reacted only to those that reinforce their optimism. That happened yesterday morning when retail sales came in way above expectations.

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: May’s retail sales (actual +17.7%; forecast +8.5%) and retail sales excl. autos (actual +12.4%; forecast +6.5%). Also for May, industrial production (actual +1.4%; forecast +2.8%) and capacity utilization (actual 64.8%; forecast 66.8%). Plus June’s homebuilders’ index (actual 63 index points; no forecast) 
• Wednesday: May housing starts (actual 0.974 million — annualized number of homes started; forecast 1.125 million) and building permits (actual 1.22 million — annualized number of building permits; forecast 1.25 million)
• Thursday: Weekly jobless claims to June 13 (forecast 1.35 million). Plus May leading economic indicators (no forecast)
• Friday: Nothing

We’ll have to wait to see which any of these make it onto investors’ radar.