Forecast plus what’s driving mortgage rates today
Average mortgage rates tumbled again yesterday, creating a new all-time low. Indeed, depending where they live, the most attractive borrowers — with solid finances, great credit and a big down payment — could today be looking at mortgage rates of 2.9x%.
Don’t be lulled by four consecutive days of falls. Only last week, we saw four consecutive days of rises. True, investors seemed to swallow a big dose of reality yesterday. But the effects seem already to be wearing off. And early signs first thing this morning were bad for mortgage rates today.
Find and lock current rates. (Jun 12th, 2020)
|Conventional 30 yr Fixed||3||3||-0.13%|
|Conventional 15 yr Fixed||2.875||2.875||+0.13%|
|Conventional 5 yr ARM||4.375||3.405||Unchanged|
|30 year fixed FHA||2.25||3.226||-0.13%|
|15 year fixed FHA||2.625||3.568||Unchanged|
|5 year ARM FHA||3.75||3.767||Unchanged|
|30 year fixed VA||2.25||2.421||-0.13%|
|15 year fixed VA||2.375||2.697||Unchanged|
|5 year ARM VA||3.5||2.816||Unchanged|
|Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here.|
• 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.
Market data affecting (or not) today’s mortgage rates
Are mortgage rates again aligning more closely with the markets they traditionally follow? It’s too soon to be sure. But, if you’re ready to take your cue from them, things are looking bad for mortgage rates today. 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 rose to 0.71% from 0.67%. (Bad 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 very sharply 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
- Oil prices inched up to $36.62 a barrel from $36.60 (Neutral for mortgage rates* because energy prices play a large role in creating inflation and also point to future economic activity.)
- Gold prices nudged higher to $1,748 an ounce from $1,746. (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 fell to 56 from 60 out of a possible 100 points. (Good 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
*A change of a few dollars on gold prices or a few cents on oil ones is a tiny fraction of 1%. So we only count meaningful differences as good or bad for mortgage rates.
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 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 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 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 week may have changed a lot of economists’ expectations. Pretty much everyone was shocked by last Friday’s much better-than-expected employment figures. But many were sobered by the Federal Reserve’s worrying forecasts for economic growth and employment on Wednesday.
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 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 has been proved right. Of course, not all experts share Hale’s rosy view, at least over the medium term.
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. OK, that’s better than they thought in April. But it’s among the less optimistic forecasts.
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.
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) was published in April. And the MBA’s and Fannie’s were released in mid-May:
Interestingly, in its May 15 forecast, the MBA predicted higher rates for the rest of this year than either Freddie or Fannie. If you’re waiting for even cheaper mortgages, you might see that as a red flag.
However, note the more optimistic numbers from Freddie on April 13 and Fannie on May 13.
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 all this? That nobody’s sure about much.
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 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 yesterday, 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 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.
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 and Wednesday’s Fed figures and forecasts were released. So, even now, some economists may be rushing to update them.
One cavat concerning the latest employment situation report. Within that, 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 independent economists. However, it’s certainly true that the bureaucracies that feed in the numbers are overstretched, making the data less accurate than normal.
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. And 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).
Indeed, on June 9, the Federal Reserve Bank of Atlanta’s GDPNow™ running resource put real GDP growth forecast for the current quarter at -48.5%. That’s better than the June 4 reading of -53.8%. But it’s still horrific.
Think that’s ridiculously overblown? Well, this morning, the UK released its GDP figure for one month (not a whole quarter). It tumbled by 20.4% just in April.
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.
On Wednesday, the Federal Reserve revealed its projections for unemployment. It thinks the rate will slip from its current high, ending this year at 9.3%. And it expects the rate still to be at an elevated 6.5% at the end of 2021.
In the same report, the Fed said its median forecast for US economic contraction in 2020 is -6.5%. That’s quite a hit. But how big?
Well, 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 on Wednesday 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.
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:
But, yesterday, the S&P 500 plunged by 5.9%. And the Dow Jones Industrial Average dropped 6.9% — or nearly 1,900 points. This morning, things couldn’t be more different.
Further to fall?
They may have further to fall before they properly reflect the current scary reality:
- Data from several states suggest the COVID-19 pandemic is far from over in the US
- The specter of a second wave (and maybe even a second lockdown) remains
- Even absent a second wave, unemployment looks set to remain high through this year and next
- A quick recovery in GDP growth may be even less likely than once thought
Generally, markets have recently been happy to ignore all that and take comfort in magical thinking. That may not have been the case yesterday. But such sentiment can turn on a dime. As it seems to have today.
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 today’s consumer sentiment index is likely to attract attention.
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 monetary policy. Wednesday afternoon brought an announcement that included forecasts, and a news conference hosted by Fed Chair Jay Powell.
We were wrong when we suggested those would need to contain something shocking to be impactful. They contained little new but certainly affected markets and mortgage rates.
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 (actual 1.54 million new claims; forecast 1.58 million). Plus May producer price index (actual +0.4%; forecast +0.1%)
- Friday: June consumer sentiment index, (actual 78.9 index points; forecast 75.0)
*Core CPI is the consumer price index with volatile prices for energy and food stripped out.
There was a time when these inflation figures were among the most closely watched. But in recent decades they’ve rarely strayed far from the predictable.
Today’s consumer sentiment index should normally have been interesting because it’s current and very relevant to an economy that’s as dependent on consumer spending as ours is. But, if it had any impact at all, that was likely lost in the wider market mayhem.
Rate lock recommendation
I suggest that you lock if you’re less than 15 days from closing. But we’re looking at a personal judgment on a risk assessment here: Do the dangers outweigh the possible rewards?
At the moment, the Fed mostly seems on top of things (though recent rises have highlighted the limits of its power). And I think it likely it will remain so, at least over the medium term.
But that doesn’t mean there won’t be upsets along the way. It’s perfectly possible that we’ll see periods of rises in mortgage rates, not all of which will be manageable by the Fed.
That’s why I’m suggesting a 15-day cutoff. In my view, that optimizes your chances of riding any rises while taking advantage of falls. But it really is just a personal view.
Only you can decide
And, of course, financially conservative borrowers might want to lock immediately, almost regardless of when they’re due to close. After all, current mortgage rates are at near-record lows and a great deal is assured.
On the other hand, risk-takers might prefer to bide their time and take a chance on future falls. But only you can decide on the level of risk with which you’re personally comfortable.
If you are still floating, do remain vigilant right up until you lock. Make sure your lender is ready to act as soon as you push the button. And continue to watch mortgage rates closely.
When to lock anyway
You may wish to lock your loan anyway if you are buying a home and have a higher debt-to-income ratio than most. Indeed, you should be more inclined to lock because any rises in rates could kill your mortgage approval. If you’re refinancing, that’s less critical and you may be able to gamble and float.
If your closing is weeks or months away, the decision to lock or float becomes complicated. Obviously, if you know rates are rising, you want to lock in as soon as possible. However, the longer your lock, the higher your upfront costs. On the flip side, if a higher rate would wipe out your mortgage approval, you’ll probably want to lock in even if it costs more.
If you’re still floating, stay in close contact with your lender.
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.
Appraisals sometimes avoidable
Many lenders are already allowing “drive-by” (exterior only) home appraisals or even wholly remote ones based on desk research.
On May 5, National Mortgage Professional magazine reported that an April 14 federal government initiative to get past some closing issues was being extended until at least June 30. The magazine listed the following bullet points:
- Alternative appraisals on purchase and rate term refinance loans
- Alternative methods for verifying employment before loan closing
- Flexibility for borrowers to provide documentation (rather than requiring an inspection) to allow renovation disbursements (draws)
- Expanding the use of power of attorney and remote online notarizations to assist with loan closings
Those directly apply only to mortgages backed by Fannie and Freddie, though individual lenders may be making similar provisions for other types of loans.
… But a big issue for closings
But another closing obstacle may prove more difficult to surmount. Many county recording offices have been closed.
And, without access to the title searches and deed filings those provide, some purchases and refinancings may stall. The industry is working to overcome this obstacle. But its response is patchy, as legal website JD Supra reports:
Title insurance companies have issued underwriting bulletins confirming they will provide title insurance coverage for transactions that occur when recording offices will not accept documents for recording. Each title company has its own requirements and limitations, so it is important to confirm those requirements on a closing-by-closing basis.
If you’re affected, talk with your loan officer, attorney or real estate agent.
Verify your new rate (Jun 12th, 2020)
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 Wednesday’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.
What causes rates to rise and fall?
In normal times (so not now), mortgage interest rates depend a great deal on the expectations of investors. Good economic news tends to be bad for interest rates because an active economy raises concerns about inflation. Inflation causes fixed-income investments like bonds to lose value, and that causes their yields (another way of saying interest rates) to increase.
For example, suppose that two years ago, you bought a $1,000 bond paying 5% interest ($50) each year. (This is called its “coupon rate” or “par rate” because you paid $1,000 for a $1,000 bond, and because its interest rate equals the rate stated on the bond — in this case, 5%).
- Your interest rate: $50 annual interest / $1,000 = 5.0%
When rates fall
That’s a pretty good rate today, so lots of investors want to buy it from you. You can sell your $1,000 bond for $1,200. The buyer gets the same $50 a year in interest that you were getting. It’s still 5% of the $1,000 coupon. However, because he paid more for the bond, his return is lower.
- Your buyer’s interest rate: $50 annual interest / $1,200 = 4.2%
The buyer gets an interest rate, or yield, of only 4.2%. And that’s why, when demand for bonds increases and bond prices go up, interest rates go down.
When rates rise
However, when the economy heats up, the potential for inflation makes bonds less appealing. With fewer people wanting to buy bonds, their prices decrease, and then interest rates go up.
Imagine that you have your $1,000 bond, but you can’t sell it for $1,000 because unemployment has dropped and stock prices are soaring. You end up getting $700. The buyer gets the same $50 a year in interest, but the yield looks like this:
- $50 annual interest / $700 = 7.1%
The buyer’s interest rate is now slightly more than 7%. Interest rates and yields are not mysterious. You calculate them with simple math.
Mortgage rate methodology
The Mortgage Reports receives rates based on selected criteria from multiple lending partners each day. We arrive at an average rate and APR for each loan type to display in our chart. Because we average an array of rates, it gives you a better idea of what you might find in the marketplace. Furthermore, we average rates for the same loan types. For example, FHA fixed with FHA fixed. The end result is a good snapshot of daily rates and how they change over time.