What’s driving current mortgage rates?
Average mortgage rates were unchanged yesterday, which was in line with our prediction. So they remain exceptionally low by 2018 and 2019 standards. Many will find that reason enough to lock now. Others may prefer to take their chances.
Markets currently seem close to directionless but capable of moving swiftly on the slightest pretext. So they barely move for days and then set off sharply up or down. A few days later, they return to roughly where they started. That can’t last forever. They’ll head off decisively sometime. Trouble is, nobody knows for sure when that will happen or whether the movement will be up or down.
The data below the rate table are indicative of mortgage rates rising today, perhaps appreciably.
|Conventional 30 yr Fixed||4.5||4.511||Unchanged|
|Conventional 15 yr Fixed||4.125||4.144||+0.13%|
|Conventional 5 yr ARM||4.188||4.701||+0.02%|
|30 year fixed FHA||3.688||4.675||Unchanged|
|15 year fixed FHA||3.625||4.575||+0.06%|
|5 year ARM FHA||3.813||5.171||+0.03%|
|30 year fixed VA||3.87||4.045||Unchanged|
|15 year fixed VA||3.813||4.126||+0.06%|
|5 year ARM VA||4||4.446||+0.02%|
|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 noticeably higher mortgage rates. By approaching 10:00 a.m. (ET), the data, compared with this time yesterday, were:
- Major stock indexes were significantly higher soon after opening (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 $1,295 from $1,302. (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 2.54 percent from 2.49 percent. (bad for borrowers). More than any other market, mortgage rates tend to follow these particular Treasury yields
- CNNMoney’s Fear & Greed Index rose to 74 from 70 out of a possible 100. Today’s movement is bad 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 a bad day for mortgage rates.
Rate lock recommendation
Yesterday, Freddie Mac chief economist Sam Khater said in a statement:
Rates moved up slightly this week while mortgage applications decreased following last week’s jump in rates – indicating borrower sensitivity to changing mortgage rates. Despite the recent rise, we expect mortgage rates to remain low, in line with the low 10-year treasury yields, boosting homebuyer demand in the next few months.
First up, Freddie’s methods of reading mortgage rates are great over the long term but not so helpful over shorter periods. Mortgage News Daily’s figures are a more accurate daily guide and those show rates fell over the last Thursday-to-Thursday week, which Freddie says it uses.
Secondly, and more importantly, Freddie’s economists may well be proven right in their prediction that mortgage rates will remain low over the next few months. But neither they nor anyone else can be certain. To be fair, they aren’t claiming to be sure. However, whenever any economist gives you predictions of the future, you should remember the famous quote coined by the late Harvard economics professor John Kenneth Galbraith:
“The only function of economic forecasting is to make astrology look respectable.”
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.
Even when one’s discernable, trends in markets never last forever. And, even within a long-term one, there will be ups and downs. Eventually, 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 a 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. That might be behind Freddie’s statement yesterday. 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.
We are today dropping the “Brexit threat” section below. On Wednesday, the UK and European Union agreed on a new exit date of, appropriately enough, Halloween. So, with luck, we can all take a breather from that unsightly mess.
Risks from an inverted bond yield curve and a future recession
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, on Wednesday, 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.
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, also last Wednesday, The 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, this Wednesday, 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 yesterday changed 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 had fewer economic reports scheduled for publication than the last two. Today’s consumer sentiment index came in a little lower than expected. It was published too close to our deadline for us to assess its impact on markets.
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 (actual 96.9; 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.