What’s driving current mortgage rates?
Average mortgage rates eased down yesterday, as we predicted. It wasn’t a big drop but it was enough to see a new low for April. Indeed, if you ignore six exceptional days at the end of March, they’re at their lowest in 15 months. Of course, you can’t ignore those days, but that does give you an idea of just how low rates are right now.
Some will see this as a trigger to lock: Why risk sudden rises when you can be sure today you’re getting a great deal? Others may wait, hoping for further falls. We’re changing our recommendation today and now suggest you lock if you’re within 30 days of closing.
So far this morning, there’s little to suggest you’ll lose or gain much today whatever you choose. The data below the rate table are indicative of mortgage rates rising just a little or perhaps holding steady today.
|Conventional 30 yr Fixed||4.5||4.511||Unchanged|
|Conventional 15 yr Fixed||3.997||4.016||-0.08%|
|Conventional 5 yr ARM||4.125||4.678||+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||5.146||-0.01%|
|30 year fixed VA||3.87||4.045||Unchanged|
|15 year fixed VA||3.75||4.063||Unchanged|
|5 year ARM VA||3.938||4.423||-0.01%|
|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 slightly higher or unchanged mortgage rates. By approaching 10:00 a.m. (ET), the data, compared with this time yesterday, were:
- Major stock indexes were mostly 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 fell to $1,302 from $1,310. (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)
- Oil prices held steady at $64 a barrel (neutral for mortgage rates because energy prices play a large role in creating inflation)
- The yield on 10-year Treasuries increased to 2.49 percent from 2.47 percent. (bad for borrowers). More than any other market, mortgage rates tend to follow these particular Treasury yields
- CNNMoney’s Fear & Greed Index held steady at 70 out of a possible 100. Today’s movement is neutral 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, it might be another unexciting day for mortgage rates.
Rate lock recommendation
Even though last week’s rises were significant, they don’t yet constitute a trend — especially in the light of this week’s more steady markets. Trends 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. On Tuesday, the International Monetary Fund cut its forecast for global growth this year to 3.3 percent from 3.5 percent. However, yesterday, Goldman Sachs said it was reducing its assessment of the chances of a U.S. recession occurring within the next 12 months to 10 percent from 20 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 tomorrow. Yesterday, there was a second last-minute postponement, this time to Oct. 31.
Will that do the trick? The British government, parliament and people all appear similarly (and similarly bitterly) divided. And there seems little reason to think that will change over the next six months. The ruling party is currently negotiating with the biggest opposition party in the hope of finding a consensus. And a new withdrawal agreement might or might not emerge from that process. But it may yet prove necessary to hold a second referendum or a general election to break the political deadlock.
Yesterday’s developments mean Brexit is now unlikely to affect American mortgage rates during the period before you close. So, from tomorrow, we’ll be dropping “Brexit threat” from our daily briefing, at least until its risks become more immediate again.
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.
But, yesterday, Treasury Secretary Steve Mnuchin hinted that one of those issues (enforcement) had been pretty much resolved. Might that change President Trump’s prediction, made last Thursday, that it might take four or more weeks to finalize an “epic” agreement? If enough investors think a shorter process with a good conclusion is likely, that could push up mortgage rates.
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, some 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 weeks, that doesn’t mean there aren’t other risks (currently known and unknown) that could see them rise, possibly sharply. But markets have been calmer over the last week. So we’re today changing our lock recommendation. We now suggest that you lock if you’re less than 30 days from closing.
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
- FLOAT 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 producer price index (PPI) came in hotter than expected. Bond markets, some of which are closely aligned with mortgage rates, hate signs of higher inflation ahead. So it’s just possible they’ll respond moderately badly. However, these PPI figures only occasionally cause much upheaval.
After yesterday’s important ones, 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 (actual +0.6 percent;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.