What’s driving current mortgage rates?
Average mortgage rates were yesterday “flat-to-slightly-higher,” to quote Mortgage News Daily. There’s a good chance your lender won’t have changed your interest rate.
Yesterday looked likely to be calm. But today has the potential to be very different. That’s because this morning saw publication of inflation data, while the minutes of the last meeting of the Federal Open Market Committee (FOMC) will be released this afternoon. Markets have a history of reacting sharply to both those, though only when they contain surprises.
The data below the rate table are indicative of mortgage rates falling just a little or perhaps holding steady today. However, this afternoon’s FOMC minutes could change all that.
|Conventional 30 yr Fixed||4.5||4.511||Unchanged|
|Conventional 15 yr Fixed||4.08||4.099||+0.08%|
|Conventional 5 yr ARM||4.063||4.656||-0.02%|
|30 year fixed FHA||3.688||4.675||Unchanged|
|15 year fixed FHA||3.563||4.512||Unchanged|
|5 year ARM FHA||3.75||5.152||Unchanged|
|30 year fixed VA||3.87||4.045||Unchanged|
|15 year fixed VA||3.75||4.063||Unchanged|
|5 year ARM VA||3.938||4.43||Unchanged|
|Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here.|
Financial data affecting today’s mortgage rates
First thing this morning, markets looked set to deliver unchanged or slightly lower mortgage rates. By approaching 10:00 a.m. (ET), the data, compared with this time yesterday, were:
- Major stock indexes were almost all a little higher soon after opening (slightly bad for mortgage rates). When investors are buying shares they’re often selling bonds, which pushes prices of Treasuries down and increases yields. See below for a detailed explanation
- Gold prices rose to $1,310 from $1,309. (Good 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)
- Oil prices fell to $64 from $69 a barrel (good for mortgage rates because energy prices play a large role in creating inflation)
- The yield on 10-year Treasuries decreased to 2.47 percent from 2.49 percent. (good for borrowers). More than any other market, mortgage rates tend to follow these particular Treasury yields
- CNNMoney’s Fear & Greed Index edged down to 70 from 72 out of a possible 100. Today’s movement is good for borrowers. “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
Unless things change, perhaps as a result of those FOMC minutes this afternoon, it might be another slow day for mortgage rates.
Rate lock recommendation
Even though last week’s rises were significant, they don’t yet constitute a trend. Those are impossible to discern from just a few days’ changes. Frustrating though it is, there really is no way of knowing immediately what movements over a brief period mean in their wider context.
Trends in markets never last forever. And, even within a long-term one, there will be ups and downs. At some point, enough investors decide to cut losses or take profits to form a critical mass. And then they’ll buy or sell in ways that end that trend. That’s going to happen with mortgage rates. Nobody knows when or how sharply the trend will reverse. But it will. That might not be wildly helpful but you need to bear it in mind. Floating always comes with some risk
Of course, it’s possible the Federal Reserve’s last big statement on rates has established a long-term downward trend. But you can still expect to see rises (such as those last week) and falls within it as other risk factors emerge and recede. And, depending on how near you are to your closing date, you may not have time to ride out any increases.
Inverted bond yield curve
You may have read about the recent (though no longer current) inversion of the bond yield curve. And you may understandably have chosen to skip over that bit. But the jargon hides a simple phenomenon: Yields on short-term U.S. Treasury bonds were higher than those for long-term ones. And that’s highly unusual. Normally, you get a higher return the longer you’re locked into an investment.
The problem is, inverted bond yields have come to be seen as harbingers of economic gloom. Recently, CNBC noted: “The U.S. Treasury yield curve has inverted before each recession in the past 50 years and has only offered a false signal just once in that time, according to data from Reuters.”
Of course, a recession couldn’t, by definition, arise before you close. But the more investors suspect there’s one on the horizon, the lower mortgage rates are likely to go. And, amid mounting evidence of an economic slowdown, concerns are real. Yesterday, the International Monetary Fund cut its forecast for global growth this year to 3.3 percent from 3.5 percent.
Brexit is Britain’s leaving of the European Union (EU). The country was first due to quit on Mar. 29 but that was postponed at the last minute to this Friday.
However, this drama looks likely to run and run, as governments in London and other European capitals scramble to put a longer (June 2019) or much longer (April 2020) extension in place. Certainly, the British government, parliament and people all seem similarly (and similarly bitterly) divided and it might take a long time to find a consensus.
The most likely (but far from certain) scenario now is that Prime Minister Theresa May will get the year-long extension with an option to leave earlier if possible. The UK can then use that time to negotiate a new withdrawal agreement — or to hold a second referendum or a general election to break the political deadlock.
If British politicians eventually find a sensible way forward, that would be good news for the global economy and might see mortgage rates rise. However, if the country crashes out of the EU with no deal later this week (still a possibility), mortgage rates could dip even further.
Meanwhile, markets are increasingly focused on current U.S.-China trade talks. A high-level Chinese delegation arrived in Washington D.C. last Wednesday to try to make progress toward an agreement.
What are the remaining issues? Well, last Wednesday’s Financial Times reported:
The two sides remain apart on two key issues — the fate of existing U.S. levies on Chinese goods, which Beijing wants to see removed, and the terms of an enforcement mechanism demanded by Washington to ensure that China abides by the deal.
Last Thursday, President Trump warned it might take four or more weeks to finalize an agreement while hailing it as potentially “epic.” Certainly, both sides badly need a good outcome, and for similar reasons: First, to burnish political prestige domestically by bringing home a win. And secondly, to step back from economic slowdowns.
However, markets worry those pressures will prevent a win-win conclusion — and might even result in no deal being reached or a lose-lose one. Once the talks end, investors will digest the outcome in detail. If no deal is concluded, or if the one that’s agreed turns out to be worse than neutral for the U.S., expect mortgage rates to tumble. But, if it’s a win-win — or even just not too terrible and simply brings uncertainty to an end — they could rise.
The last big Fed announcement, which was doveish and ruled out further rate hikes this year, will likely add some downward pressure on mortgage rates in coming months. As we’ve seen in recent days, that doesn’t mean there aren’t other risks (currently known and unknown) that could see them rise, possibly sharply. And those recent rises create new grounds for caution. So we last week changed our advice. We now suggest that you lock if you’re less than 45 days from closing. However, if we get through today’s inflation reports and Federal Reserve minutes without too much incident, we may reduce that to 30 days tomorrow.
Of course, financially conservative borrowers might want to lock immediately, regardless of when they’re due to close. On the other hand, risk takers might prefer to bide their time. 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. Continue to watch key markets and news cycles closely. In particular, look out for stories that might affect the performance of the American economy. As a very general rule, good news tends to push mortgage rates up, while bad drags them down.
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, and keep an eye on markets. I recommend:
- LOCK if closing in 7 days
- LOCK if closing in 15 days
- LOCK if closing in 30 days
- LOCK if closing in 45 days
- FLOAT if closing in 60 days
This week has fewer economic reports scheduled for publication than the last two. Today’s likely to be the most important day, with March’s consumer price index out earlier. The headline figure on that was exactly as estimated. However, real hourly earnings declined by -0.3 percent that month, compared to February’s +0.2 percent.
Also today, at 2:00 p.m. (ET), the Federal Open Market Committee (FOMC — the Federal Reserve body that determines its and many other interest rates) will release the minutes of its last meeting. Markets are always sensitive to any surprises in those.
Besides today’s, most other reports this week are less likely to create waves. However, any can, if it contains shockingly good or bad data.
Markets tend to price in analysts’ consensus forecasts (we use those reported by MarketWatch or Bain) 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. 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.
- Monday: February factory orders (actual -0.5 percent; forecast -0.5 percent)
- Tuesday: Nothing
- Wednesday: March consumer price index (CPI) (actual +0.4 percent; forecast +0.4 percent); March core CPI (actual +0.1 percent; forecast +0.2 percent); and March real hourly earnings (actual -0.3 percent; no forecast). Also minutes of the last meeting of the FOMC (see above)
- Thursday: March producer price index (forecast +0.3 percent)
- Friday: April consumer sentiment index (forecast 98.0)
MarketWatch’s economic calendar remains (yes, really) slightly chaotic in the wake of the recent government shutdown. Some numbers published this week are for earlier periods than would normally be the case, and others are still being delayed.
What causes rates to rise and fall?
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 percent 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 percent).
- 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 percent 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 percent. 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 seven percent. 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.