What’s driving current mortgage rates?
It was another bad day for average mortgage rates yesterday. After a lull on Tuesday, they rose sharply again, though not by quite so much as on Monday. Still, by yesterday evening those rates were close to where they were on Mar. 20, meaning all borrowers’ gains since then have been wiped out. They remain, of course, appreciably lower than they were earlier in March and during preceding months.
Although there are some risk factors that could see rates fall again, we are today changing our rate lock recommendation. We now suggest that you lock if you’re within 45 days of closing. However, it might not quite yet be time to panic.
Because the data below the rate table are indicative of mortgage rates holding steady today or perhaps just inching either side of the neutral line. However, regular readers will know these morning snapshots are intended as helpful guides rather than bullet-proof forecasts.
|Conventional 30 yr Fixed||4||4||Unchanged|
|Conventional 15 yr Fixed||4.08||4.099||Unchanged|
|Conventional 5 yr ARM||4.063||4.63||Unchanged|
|30 year fixed FHA||3.688||4.675||Unchanged|
|15 year fixed FHA||3.688||4.638||+0.13%|
|5 year ARM FHA||3.75||5.135||Unchanged|
|30 year fixed VA||3.933||4.109||Unchanged|
|15 year fixed VA||3.813||4.126||Unchanged|
|5 year ARM VA||3.938||4.411||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 barely changed 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 (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 $1,285 from $1,294. (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 inched down to $62 from $63 a barrel (good for mortgage rates because energy prices play a large role in creating inflation)
- The yield on 10-year Treasuries edged upt o 2.52 percent from 2.51 percent. (bad for borrowers). More than any other market, mortgage rates tend to follow these particular Treasury yields
- CNNMoney’s Fear & Greed Index increased to 71 from 65 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
In spite of all those “bad for mortgage rates/borrowers,” markets look much calmer this morning than they did this time yesterday.
Rate lock recommendation
Even though this week’s rises have been 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 the 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 has established a long-term downward trend. But you can still expect to see rises (such as yesterday’s) 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. Last week, 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 concerns are real. Last Friday, the Comerica Economic Weekly newsletter said, “U.S. economic growth cooled through the fourth quarter of last year, and continued to cool into the first quarter of this year.” And, on the same day, McKinsey & Company published its Economic Conditions Snapshot for March. And it said its survey’s respondents “report an overall wary economic outlook and are increasingly concerned over trade.”
Brexit is Britain’s leaving of the European Union (EU). It was first due to leave last Friday but managed to negotiate a last-minute extension to April 12.
Yesterday, the House of Commons (the parliamentary chamber closest to our House of Representatives) passed by one vote a bill to force the administration to seek a further, longer extension and to prevent a no-deal Brexit. “No deal” would see the country crash out of the EU without any agreement and hope to trade under World Trade Organization rules. Nearly all economists and most businesspeople think that would be a monumental folly that would cause immeasurable economic self-harm.
Yesterday’s bill isn’t yet law. It still has to win a majority in the House of Lords, which you could think of as a bit like our Senate, though it’s actually quite different. That majority is likely to already exist but it’s almost inevitable that opponents will do their best to block the legislation using procedural devices. Still, there’s a real probability the bill will be enacted this week or next. Indeed, at the time of writing, there was a good chance it would pass later today.
The most likely (but far from certain) scenario now is that the British Prime Minister will request a much longer extension — maybe one or two years — during which the UK can negotiate a new withdrawal agreement — or 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 in less than two weeks, mortgage rates could dip even further.
Meanwhile, markets are increasingly focused on current U.S.-China trade talks. U.S. Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer were in China last week to push toward an agreement. And a similarly high-level Chinese delegation arrived in Washington D.C. yesterday. President Trump is expected to join the talks later today. So later this week is the first time a text could be unveiled. However, one expert told CNBC last week that he didn’t expect to see a draft before May or June. Yesterday’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.
Still, the administration continues to be generally upbeat about progress. However, others see potential problems. The President’s original Mar. 1 deadline for an agreement passed more than a month ago. But 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 today we are changing our advice. We now suggest that you lock if you’re less than 45 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
- LOCK if closing in 45 days
- FLOAT if closing in 60 days
Although it’s another busy week for economic reports, nothing significant is scheduled for publication today. Markets are likely to be sensitive to tomorrow’s official employment situation report.
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 retail sales (actual -0.2 percent; forecast +0.3 percent); Institute of Supply Management (ISM) manufacturing index for March (actual 55.3 percent; forecast 54.6 percent); February construction spending (actual +1.00 percent; forecast -0.1 percent)
- Tuesday: February durable goods orders (actual -1.6 percent; forecast -2.0 percent)
Wednesday: ISM non-manufacturing index for March (actual 56.1 percent; forecast 58.1 percent); March ADP employment report (actual 129,000)
- Thursday: Nothing
Friday: March employment situation report, including nonfarm payrolls (forecast +179,000); unemployment rate (forecast 3.8 percent); and average hourly earnings (forecast +0.3 percent)
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.