Forecast plus what’s driving mortgage rates today

Average mortgage rates fell sharply yesterday. And suddenly they’re back within their uberlow range. Indeed, a repeat of yesterday’s fall would set a new all-time low.

But we’re roughly as likely to see a further fall of any size as we are to witness a bounce back up. These rates are currently as unpredictable as they are volatile, making every lock-or-float decision a gamble. If I were you (and were getting near to my closing date), I’d think hard about locking now. I wouldn’t be getting a record low but I would be certain of an amazing deal.

Important notes on today’s mortgage rates

• COVID-19 mortgage updates: Mortgage lenders are changing rates and rules due to COVID-19. To see the latest on how coronavirus could impact your home loan, click here.

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).

Still, before locking, everyone buying or refinancing stands to lose or gain when rates change.

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 likely 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 why we’ve been.

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 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 yesterday morning, were:

• The yield on 10-year Treasurys inched down to 0.79% from 0.81%. (Good for mortgage rates.) More than any other market, mortgage rates normally tend to follow these particular Treasury bond yields, though less so recently
• Major stock indexes were mixed. (Neutral 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
• Oil prices nudged up to $38.10 a barrel from $38.09 (Neutral for mortgage rates* because energy prices play a large role in creating inflation and also point to future economic activity.) 
• Gold prices eased higher to $1,729 an ounce from $1,721. (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.
•  CNN Business Fear & Greed index inched higher to 68 from 67 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 on any given day. But those rates are for now divorced from those markets — and those markets are untethered from reality.

Are things changing?

Having said that, Mortgage News Daily (MND) reckons that mortgage bonds are now more closely tracking other bonds than they’ve been doing recently. And the other bonds that they traditionally shadow most closely are 10-year Treasurys.

Over recent days, MND has been right. Mortgage rates have been tracking the yield on those Treasurys. We’re not yet sufficiently certain to use them to make daily predictions of where those rates will move.

But you may decide to take your cue from them. If so, they’re the first item on the market data list, above. And, at the moment, they’re looking neutral-to-slightly-good for mortgage rates today.

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. (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.

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 May 12, 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.

We’ve been saying since then that you might see some lenders offering mortgages at sub-3% rates sooner than most expected. And, sure enough, a few already have been.

What a mortgage-backed security is

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

So how come 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). Over many weeks, there were more than twice as many applications as during the same period a year earlier. That demand’s eased a little recently. Still, in today’s figures, which cover the week ending June 5, they were still up 80% compared with that week in 2019.

So no surprises there. As you’d expect, current, exceptional lows for these rates have been 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, many are 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, with so many competing pressures, don’t expect a smooth ride.

Higher rates that are unconnected to MBS prices

And there’s a supply issue that’s been happening further down the mortgage production line than where the Fed is tinkering — and than where higher prices mean lower yields and rates.

Lenders who can’t cope with sudden tsunamis of demand try to manage their workloads by deterring would-be borrowers through higher rates. And, in this way, 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.

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.

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 its May report, published yesterday, 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.

What economists expect for mortgage rates

Last Friday may have changed a lot of economists’ expectations. Pretty much everyone was shocked by that day’s much better-than-expected employment figures. It’s too soon to say that those have transformed the economic landscape. But read the following with the knowledge that the forecasts cited were made well before Friday’s shock announcement.

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.”

Of course, not all experts share Hale’s view. In their latest forecast, published on May 15, the MBA’s economists predicted 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. But it’s among the less optimistic forecasts.

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% for the whole of 2021.

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

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. Again, the following forecasts were made before last Friday’s employment numbers were published. So, even now, some economists may be rushing to update them.

Having said that, it’s often a mistake to read too much into one set of figures. And the threat of a second wave of COVID-19 infections remains very real.

But there’s an even bigger caveat. Within that Friday report, the Bureau of Labor Statistics acknowledged a “misclassification error.” And, without that, the “overall unemployment rate would have been about 3 percentage points higher than reported,”

So the true unemployment rate may be 16.3% instead of 13.3%. Still, the same error occurred in April. So May’s fall was real enough.

Conspiracy theories that all these figures were rigged for political purposes are widely dismissed by economists, though it’s certainly true that the bureaucracies that feed in the numbers are overstretched, making the data less accurate than normal.

GDP

On Monday, the National Bureau of Economic Research said the U.S. economy been in a downturn since February. That ended a record period of expansion that lasted nearly 11 years. The NBEA is the body that officially defines recessions. So we’re in one.

In the first quarter, US gross domestic product (GDP) fell by 5.0%, according to official figures, updated last week. But things are looking way worse for the current quarter (April 1-June 30).

So, on June 9, the Federal Reserve Bank of Atlanta’s running GDPNow put real GDP growth forecast for the current quarter at -48.5%. That’s better than the June 4 reading of -53.8%. But still horrific.

Employment

Meanwhile, last Friday’s official employment situation report showed May’s unemployment rate at 13.3% (or 16.3% — see above), compared with April’s 14.7% (or 17.7%). That was a very pleasant surprise, though only in the context of terrible expectations. February saw a more normal 3.5%.

Extraordinarily, at 20.5 million, the total number of jobs lost in April was a grizzly record. In fact, it was more than twice as many in that one month than the 8.7 million that disappeared throughout the Great Recession.

But, in mid-May, Goldman Sachs forecast much worse unemployment. It’s expecting a 25% rate at the peak. And on May 22, JPMorgan Chase predicted an unemployment rate of at least 10% through the first quarter of 2021. Both banks may wish to revisit those predictions after the most recent employment situation report.

Recession

Last Monday, 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.

And that general message was reinforced overnight by the Organization for Economic Cooperation and Development (OECD). The Financial Times reported:

In a downbeat set of forecasts, the international organization said on Wednesday that although developed economies were likely to experience a rapid initial bounce-back from the recession, it would probably fall far short of bringing living standards back to their pre-pandemic level in early 2020.

A recession (defined as a fall in GDP in two or more successive quarters) is officially already upon us. 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. Indeed, they may well be preening themselves following last Friday’s 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.

Don’t take forecasts too seriously

And that’s a sentiment shared by many. Of course, all the above forecasts are justifiably worrying and must be taken seriously. But don’t assume that they’re going to prove wholly accurate.

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 on Monday, The Financial Times reported on New York stock markets:

US stocks have recouped all of their losses for the year thanks to a rally spurred by central bank stimulus and optimism among investors that economic activity may be rebounding.

The S&P 500 advanced 1.2 per cent to close at 3,232.39, back above their level at the start of 2020, building on gains from Friday’s unexpected rise in US employment in May.

For context, all this has been happening when company results are poor. On May 1, analytics firm FactSet calculated that earnings for S&P 500 companies during the first quarter were down -13.7% — the worst fall since 2009. And the firm expects worse to come: a fall of 43% in the current quarter and of 25% in the next.

Last Wednesday’s New York Times noted, “By some measures, stocks are as expensive, relative to earnings, as they were in the heady dot-com days.”

And, 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. And now they’re seeing the same civil unrest.

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. On June 5, The Times put it this way:

Trepidation about current price levels is widespread. But so is the assumption that it would be unwise, short-term, to bet heavily against a rising market when the Federal Reserve is bolstering it.

For investors, the downside of the new, unexpectedly good employment numbers is that they may give the Fed (watch out for policy announcements later today!) and politicians an excuse to turn off the funding faucet. Some economists warn that could kill the nascent recovery.

However, this strategy’s success depends on a very quick economic recovery (a V-shaped recession) once the COVID-19 threat dissipates. And, while those employment figures increase the chances of one of those emerging, a single report does not a recovery make.

Economic reports this week

Economic reports are unlikely to have much impact on markets or mortgage rates this week. For once, this has nothing to do with investors turning a blind eye to bad news. It’s just that there’s little to pique their interest. Only Friday’s consumer sentiment index is likely to attract attention, and even then only if it’s unexpectedly good.

Another big event is not an economic report as such. It’s this week’s meeting of the Federal Open Market Committee (FOMC), which is the Federal Reserve policy committee that determines that organization’s interest rates — and therefore many others. Wednesday afternoon brings an announcement that includes forecasts, and a news conference hosted by Fed Chair Jay Powell. Don’t expect much reaction to these, unless they contain something shocking.

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 small-business index from the National Federation of Independent Business (NFIB) (actual 94.4 index points; no forecast but 90.9 in April)
• Wednesday: May consumer price index (CPI) (actual -0.1%; forecast 0.0%) and core CPI* (actual -0.1%; forecast 0.0%). Plus FOMC announcement with forecasts (2 p.m. (ET)) and news conference 30 minutes later
• Thursday: Weekly jobless claims to June 6 (forecast 1.58 million new claims). Plus May producer price index (forecast +0.1%)
• Friday: June consumer sentiment index, (forecast 75.0)

*Core CPI is the consumer price index with volatile prices for energy and food stripped out.