Forecast plus what’s driving mortgage rates today

Average mortgage rates fell appreciably yesterday — at last. By coincidence, they ended up back where they were last Thursday evening. And that’s a good outcome, given the rises earlier in the week. As is often the case, Freddie Mac’s weekly rates bulletin was a bit out of date yesterday.

Chances are, the Federal Reserve’s interventions in the mortgage bond market (details below) were behind that fall. And, with luck, those will bring more of the same. But an additional issue is complicating matters. Non-bank mortgage lenders, which originate more than half of mortgages, are experiencing liquidity (cash flow) issues. And, if that forces them to cut the supply of new loans, it could put upward pressure on these rates. Again, see below for more details.

Predicting what will happen to mortgage rates today remains impossible — and will do so until they get back into alignment with other markets. But we remain optimistic that the Fed will prevent serious rises and maybe push them lower in coming days and weeks.

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

We still see no reason to think markets are currently providing many clues as to what may happen to mortgage rates today. But, in the hope you have insights that we’re missing, here’s the state of play. By approaching 10 a.m. (ET), the data, compared with roughly the same time yesterday morning, were:

• Major stock indexes were mixed but mostly modestly lower. (Neutral 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 increased to $1,638 an ounce from $1,623. (Bad 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 shot up to $26.74 a barrel from $21.93 (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 inched lower to 0.59% from 0.60%. A year ago, it was at 2.51%. (Neutral for mortgage rates.) More than any other market, mortgage rates normally tend to follow these particular Treasury bond yields, though less so recently
•  CNN Business Fear & Greed index nudged up to 24 from 22 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

Another good day for mortgage rates is likely soon. But will it be today? Nobody knows. If it is, it will be because the Fed holds the line against investors who’d like those rates to be higher.

Rate lock advice

Based on today’s mortgage rates and market movements, I personally recommend:

• LOCK if closing in 7 days
• LOCK if closing in 15 days
• LOCK 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 over the coming weeks, though that’s far from certain. And you can expect plenty of bad days.

More 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.

This week

How the Fed’s helping mortgage rates now

In an announcement last Monday, the Federal Reserve said it was lifting the cap on its purchases of mortgage-backed securities (MBSs). For now, there would be no limit on how much it would spend buying these.

MBSs are bond-like bundles of mortgages that are traded on a secondary market. And it’s the price of these rather than anything else that determines your mortgage rate.

For reasons explained near the end of this article, the higher the price of MBSs, the lower the rate you’ll pay. Given that the Fed is a uniquely huge new buyer in that market, it should generate increased demand that raises MBS prices and so creates lower yields and mortgage rates.

So that’s the theory. But we’ve seen a lot of those crumble to dust in recent weeks. And only time will tell how well this one holds up in practice.

Challenges to the Fed’s program

That Fed program seemed to be working pretty well for mortgage rates last week. Yes, there were days that saw rises. But most brought falls and those easily outweighed the increases. So how come the first three days of this week brought rises?

There’s a lot going on here. But a big reason may be a resurgence in new applications for mortgages and especially refinances. During the seven days ending March 27, those refinances jumped 26% compared with the previous week, and was up 168% on the same period in 2019, according to the Mortgage Bankers Association.

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. Some investors make losses on especially fast refinancings.

So the last thing they want is to replace lost mortgages with ones at an even lower rate. And, understandably, they shy away from MBSs. But supply and demand mean that inevitably pushes up mortgage rates.

So the Fed is having to resist the market forces that arise when investors vote so decisively with their feet. We still think it likely that it will get its way in the end and push mortgage rates lower. But don’t expect a smooth ride.

Fly meets ointment

Yesterday, National Mortgage Professional magazine led with this:

Moody’s has announced that it has changed its outlook on the non-bank mortgage sector from “Stable” to “Negative,” as liquidity issues continue to cause concern amid the COVID-19 pandemic. Non-bank mortgage companies currently originate and service more than half of all residential mortgages in the U.S.

In other words, many of the companies that originate mortgages but that aren’t actual banks are having cash flow problems arising from COVID-19. Ratings agency Moody’s expects them to get over those in a year or so. But, in the meantime, that could cause supply issues in the residential mortgage market.

And, of course, a reduced supply of any product tends to push prices (or rates in this case) upward. This happens further down the mortgage production line than where the Fed is tinkering. So we may see (or have already seen) higher rates that are unconnected with MBS prices. You can now see why we said there’s a lot going on here.

New stimulus package

Last Friday, President Donald Trump signed into law H.R. 748, The Coronavirus Aid, Relief and Economic Security Act (CARES Act), a $2.2-trillion stimulus package.

After recent rises in response to that package, it may feel as if stock markets have largely recovered from their earlier coronavirus falls. But the reality is quite different. Tuesday marked the end of this year’s first quarter. And Wall Street indexes were down on average 20% over that period. Yes, they rose yesterday. But not by enough to make a dent.

More pain ahead?

Perhaps investors are recognizing the possibility of a nasty financial hangover after the stimulus. Yesterday, we learned that very nearly 10 million Americans had claimed for unemployment insurance within the previous two weeks. And last Wednesday’s New York Times quoted analysts at the Eurasia Group:

The U.S. is likely on pace for an annual deficit of at least $4 trillion and likely higher, in the range of 15-20 percent of G.D.P. [gross domestic product].

And on Tuesday the same newspaper noted, “With the $2 trillion economic stimulus just signed into law on Friday, Washington is already considering a fourth response package to combat the spread of the coronavirus and bolster a shuddering economy.” That now seems close to inevitable.

Some economists subscribe to modern monetary theory (MMT), which says we shouldn’t be too bothered by large national debts and deficits. But many still will be.

Unemployment could soar

Social media have recently started sharing widely some scary employment numbers contained in a blog published by the Federal Reserve Bank of St. Louis on March 24. It predicted 47.05 million Americans could be laid off during the second quarter (April through June) of this year, bringing the unemployment rate to 32.1%.

To be fair, the author stressed that this was just one possible outcome based on a model containing several assumptions. And even he referred to them as “back-of-the-envelope estimates.”

But we’ve already seen 10 million jobs lost in two weeks, So that projection may not be as fanciful as it appeared when it was published. And if COVID-19 gets that sort of grip on the American economy (and presumably something similar globally), we could be looking at a transformed world.

Closing help …

Closing on a real estate transaction is hard enough without the extra obstacles erected by social distancing and lockdowns. So some are trying to dismantle the biggest barriers.

Legislators are currently working on a law that could further facilitate remote, electronic signing of closing documents. That’s generally already legal under the Electronic Signatures in Global and National Commerce Act (E-Sign) and various state laws. But a new bipartisan bill is intended to make it easier and more commonplace.

And Fannie Mae, Freddie Mac and probably others are being less strict about some aspects of verification. So, perhaps, your employer, working from home without access to paper files, may be able to certify your employment by email rather than provide documentary evidence.

… But a big issue for closings

But another obstacle may prove more difficult to surmount. In New York (and presumably other states already or soon), government recording offices have been closed.

And, without the access to title searches and deed filings those provide, purchases and refinancings may stall. Maybe someone will come up with a workaround — as they are doing for those other issues. But, right now, it’s hard to see how people will be able to close without title searches.

An economist writes …

On March 16, 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 still seem reasonable expectations. But how much good that will do buyers and homeowners who are refinancing who can’t close transactions is unclear. If you’re in the process of purchasing a home or are midway through a refinance, you might want to get your skates on.

Virus still the biggest factor for mortgage rates

COVID-19 stands for Coronavirus disease 2019 and refers to the disease. SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2) is the name of the virus itself. But, whatever you call it, it’s certainly been behind the chaos seen in global markets since Feb. 20. Gosh, a lot can happen in a little over six weeks.

The virus now has a confirmed presence on five continents (none in Antarctica) and in 204 countries and territories. Here at home, the US has 245,442 cases, up from 215,357 yesterday. It ranks No. 1 on a list of countries with the most infections with a level that nearly matches the next two added together.

And, with 6,098, we come in third for COVID-19-related deaths, although considerably lower on a per capita basis. But we’re at an earlier stage of infection than those with higher numbers. So the prospects are grim.

Of the world’s top-10 economies, seven now count their infections in the tens of thousands or, in the case of America and Italy (Spain has the 13th biggest GDP), more than 100,000. All the others have infections in the thousands.

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 when trading is the virus’s economic consequences, which are a byproduct of the medical ones.

Worldwide worries

On March 20, The New York Times “Deal Book” newsletter summed up how many investors and economists see the near and medium-term future:

Economists have been slashing their forecasts, and the numbers are grim, especially for the second quarter. But what real difference does it make if Goldman Sachs thinks the U.S. economy will shrink by 5% and Deutsche Bank expects a 13% fall? It’s going to be bad, and the of the downturn is what many are focusing on now.

Forecasts are changing so quickly that there’s little point in trying to keep up with them. Just know that many economists expect COVID-19 to bring the worst global recession or depression in living memory — perhaps ever.

This is beginning to be more widely understood by the American people. The Pew Research Center has recently been tracking how they feel. When polled during March 10-16, 70% perceived COVID-19 as a threat to the American economy and 34% saw it as a threat to their own finances. But when asked again between March 19 and 24, those numbers had risen to 88% and 49% respectively.

And, among respondents who gave an answer, 17% expected a depression, 48% a recession and 34% an economic slowdown.

Central banks face problems

Traditionally, central banks intervene during troubled times to prop up their economies. And they mostly have in response to COVID-19. But markets have often reacted badly to those interventions.

And, with much of their armory already depleted, some are wondering how much more they can do. “Whatever it takes” is a better slogan than plan.

However, last week, Federal Reserve Chair Jay Powell took to the airwaves to assure investors that his organization will “never run out of ammunition.”

How scary are the health implications?

Overnight figures show COVID-19 has been confirmed in 1,039,158 (up from 961,343 yesterday) cases around the world, and has killed 55,163 (up from yesterday’s 49,160). 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 (5.3%) 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% — about 10 times that of seasonal flu. But it’s too soon to make definitive judgments.

However, On March 11, 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. Meanwhile, on March 19, California state planners projected a possible 56% infection rate within eight weeks, which presumably might rise close to those European estimates over a longer period.

If those worst-case 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 (of 7.7 billion people) becomes infected and 1% of those die, that’s 58 million deaths. A mid-March report from Imperial College London projected a worst-case death toll of 2.2 million Americans, though the sorts of containment measures being implemented in some states could halve that.

Still, many epidemiologists are less pessimistic. Tuesday’s White House news conference suggested American deaths in a range of 100,000-240,000.

Economic reports this week

Domestic economic reports have had almost zero impact on markets since COVID-19 became an issue. They shrugged off even yesterday’s devastating 6.6 million new filings for unemployment benefits over a seven-day period.

So, while normally this week would be an important one for those reports, it may well turn out to be yet another damp squib.

Still, two reports just might have cut through. Tuesday’s consumer confidence index showed how American attitudes are currently holding up amid virus mayhem.

And today’s monthly employment situation report provided a snapshot of the labor market in March. But, of course, only the latter part of that month was seriously affected by COVID-19.

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.

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 important, domestic economic reports comprises:

• Monday: Nothing
• Tuesday: March consumer confidence index (actual 120.0 index points; forecast 115.0)
• Wednesday: March ISM* manufacturing index (actual 49.1%; forecast 43.5%) and February construction spending (actual -1.3%; forecast +0.5%)
• Thursday: weekly jobless claims (actual 6.6 million new claims; forecast 4.0 million).
• Friday: March employment situation report, including nonfarm payrolls (actual -701,000 fewer jobs; forecast -140,000), unemployment rate (actual 4.4%; forecast 3.7%) and average hourly earnings (actual +0.4%; forecast +0.2%). Plus ISM* nonmanufacturing index (actual 52.5%; forecast 43.0%)

*ISM is the Institute for Supply Management