Forecast plus what’s driving mortgage rates today
Average mortgage rates held steady on Friday, as we predicted. That was no surprise for a mid-holiday, half-day trading period. And it leaves those rates in a good place: not close to setting record lows, but seriously attractive compared with all but the most exceptional times in history.
Markets were being pulled in two directions this morning. On the one hand, skepticism over the prospects for the US-China trade deal grew over the weekend. On the other, unexpectedly good figures for Chinese manufacturing emerged overnight. So far, in some markets, those seem to be canceling each other out. But not in some key ones.
But, for now, mortgage rates today look likely to rise, although not all markets are aligned behind that prediction. And, as always, events might overtake that forecast. In particular, late-breaking US economic data have already started to push them in more rate-friendly directions.
|Conventional 30 yr Fixed||3.833||3.833||Unchanged|
|Conventional 15 yr Fixed||3.417||3.417||Unchanged|
|Conventional 5 yr ARM||4.563||4.327||Unchanged|
|30 year fixed FHA||3.292||4.276||Unchanged|
|15 year fixed FHA||3.25||4.198||Unchanged|
|5 year ARM FHA||3.333||4.477||Unchanged|
|30 year fixed VA||3.25||3.431||Unchanged|
|15 year fixed VA||3.25||3.58||+0.04%|
|5 year ARM VA||3.333||3.683||Unchanged|
|Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here.|
About the Daily Rate Update
Market data affecting today’s mortgage rates
First thing this morning, markets looked set to deliver mortgage rates today that are higher. Soon after 10 a.m. (ET), the data, compared with the same time on Friday morning, were:
- Major stock indexes were all lower. (Good for mortgage rates.) When investors are buying shares they’re often selling bonds, which pushes prices of Treasurys down and increases yields and mortgage rates. The opposite happens on days when indexes fall. See below for a detailed explanation
- Gold prices held steady at $1,464 an ounce. (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
- Oil prices edged down to $56 a barrel from $57. (Good for mortgage rates, because energy prices play a large role in creating inflation)
- The yield on 10-year Treasurys rose to 1.84% from 1.78%. (Bad for mortgage rates.) More than any other market, mortgage rates tend to follow these particular Treasury bond yields
- CNN Business Fear & Greed index moved to down to 75 from 80 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
Today might be a worse day for mortgage rates. But it’s hard to tell for sure. Days like today, when markets are acting so differently from one another, are rare.
Economic reports and events this week
There are plenty of economic reports with the potential to move markets due for publication this week. Friday’s the most dangerous day because that sees the release of the official, monthly employment situation report. And markets routinely seize on those.
Some are concerned by suggestions that Black Friday trading was disappointing for many traditional retailers. But First Data this morning reported sales by value in brick-and-mortar stores were up 4.2% compared with 2018. We’ll have to wait to see which narrative gains traction in markets.
Both today’s key economic reports were published at 10 a.m. (ET), which is close to this column’s deadline. So, although you’ll find the numbers below, we haven’t had time to fully assess their impact on markets. But both figures were disappointing and likely to put downward pressure on mortgage rates.
Every economic report has the potential to make waves if it unexpectedly presents figures that are catastrophically terrible or exceptionally good.
That’s because markets tend to price in analysts’ consensus forecasts (below, we mostly 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.
Although there are exceptions, you can usually expect downward pressure on mortgage rates from worse-than-expected figures and upward on better ones. However, for most reports, much of the time, that pressure may be imperceptible or barely perceptible.
This week’s calendar
- Monday: November manufacturing index from the Institute of Supply Mangement (ISM) (actual 48.1%; forecast 49.2%). Plus October construction spending (actual -0.8%; forecast +0.4%)
- Tuesday: Nothing. Motor vehicle sales for November will emerge during the day as individual manufacturers make their announcements
- Wednesday: ISM nonmanufacturing index for November (forecast 54.7%). Also, the ADP employment report can sometimes be influential as a predictor of Friday’s official numbers
- Thursday: October trade deficit (forecast -$48.5 billion) and factory orders (forecast +0.2%)
- Friday: Official November employment situation report comprising nonfarm payrolls (forecast 189,000 new jobs), unemployment rate (forecast 3.6%) and average hourly earnings (forecast +0.4%). Also December consumer sentiment index (forecast 96.8 index points)
As always, there are plenty of other sources of potential volatility. Right now, the unfolding drama of the US-China trade talks is the most obvious. But the possibility of a government shutdown on Dec. 20 may also begin to influence markets more. And, of course, there’s always a chance of some other issue — foreign or domestic — flaring up. Anything that might impact the US economy significantly is likely to affect markets.
Today’s drivers of change
US-China trade dispute
Most sharp movements in mortgage rates in recent months have been largely down to alternating optimism and pessimism over the US-China trade dispute. Indeed, over the last few months, that dispute has probably been the main driver of changes in most markets as they’ve moved in line with emerging and receding hopes of a resolution.
And there’s been a lot of emerging and receding going on over the last few weeks. There were stories over the weekend saying that China is now demanding the removal of all existing tariffs before it will sign the currently proposed phase-one trade deal. This morning, CNN Business quoted Craig Erlam, a senior market analyst with Oanda:
A deal looks no closer to being achieved and if reports over the weekend are to be believed — that China wants the full removal of existing tariffs — I don’t expect it to be wrapped up any time soon
The trade talks and recent events
Some of China’s new tough talk may be a result of President Donald Trump signing last Wednesday an act that supports pro-democracy activists in Hong Kong. The Chinese regime is notoriously sensitive about its human rights record.
Last Tuesday, the president told reporters at the White House, “We’re in the final throes of a very important deal, I guess you could say one of the most important deals in trade ever.” However, later that same day, he told Bill O’Reilly in an interview, “I’m holding it up because it’s got to be a good deal.” And the week before, he said that he was unsure that a deal would be finalized this year, accusing China of not “stepping up.”
The president’s ever-changing assertions may well reflect an evolving behind-the-scenes situation. Or they may be part of his negotiating strategy. But, after a while, investors end up treating them like background noise. And his recent comments seem to have had little impact on markets.
On Oct. 11, mortgage rates rose sharply when the president first unveiled a phase-one deal that he said was agreed “in principle.” Since then, there’s been no corresponding sharp fall as hopes for that agreement slowly deflated. Rather, we’ve seen those rates move back down in a series of small reductions.
Right now, many would welcome any signs of this trade dispute heading toward a resolution. A new round of American tariffs on Chinese goods became operative on Sept. 1. The Peterson Institute for International Economics reckoned that brought the average US tariff on imports from that country to 21.2%, up from 3.1% when President Trump was inaugurated. More tariffs were due to be imposed through the rest of this year. And those may yet be implemented if no deal is reached.
But this dispute has been causing some pain to both sides. China’s slipped to third place from first in the list of America’s trading partners. Meanwhile, researchers from University College London and the London School of Economics calculate the average American family will pay about $460 a year in higher prices as a result of the tariffs implemented so far. Other studies suggest far higher impacts on household budgets.
And, on Nov. 22, Moody’s Analytics’ chief economist Mark Zandi published a report suggesting that the US economy had lost 300,000 jobs as a direct result of this trade dispute. Separately, he told CBS Moneywatch that “some 450,000 fewer jobs will be created by year-end” if current tariffs remain in place and new ones are implemented on schedule.
Of course, unemployment is already at a near-record low. But it could be even lower (and perhaps wages better) absent the US-China dispute.
European Union next?
On October 18, the US imposed tariffs on goods worth $7.5 billion from European Union (EU) countries. The EU is the world’s biggest trading bloc. In response, the EU introduced import duties of 25% on American goods worth $2.8 billion.
These moves follow a WTO ruling on Oct. 2 on a 15-year dispute over subsidies given to airplane manufacturers Boeing and Airbus. This decision found that EU subsidies had been unfair. A ruling on US subsidies for Boeing is expected in 2020.
Separately, the president occasionally makes bellicose remarks about what he perceives to be an unfair trade imbalance between the US and EU.
How trade disputes hurt
All this has been fueling uncertainty in markets. And that, in turn, is creating volatility. Many of the recent wild swings in mortgage rates, bond yields, stock markets, and gold and oil prices have been down to hopes and fears over trade.
Markets generally hate trade disputes because they introduce uncertainty, dampen trade, slow global growth and are disruptive to established supply chains. President Trump is confident that analysis is wrong and that America will come out a winner.
However, some fear a trade war — possibly on two fronts — might be a drag on the global economy that hits America hard. And that fear, in turn, is likely to exert long-term downward pressure on mortgage rates, relieved only by hopeful news.
On Sept. 25, The New York Times suggested the current move in the House of Representatives to impeach the president may have only a limited effect on markets. It used the word “fleeting” to describe the probable impact. And, at least so far, its prediction seems to be holding up, in spite of some dramatic scenes on Capitol Hill.
However, the Times went on to warn that the knock-on effects could become more sustained and damaging. That might arise if the president uses escalations in the trade war with China to distract voters from proceedings in Congress.
Alternatively, the Times speculated, the effects might be benign if they mean he personally is distracted by the process and loses focus on trade.
Remember, those who want lower mortgage rates need bad news.
Treasurys and mortgage rates
Why are mortgage rates currently so often out of sync with the markets they usually shadow? After all, markets are generally interdependent.
During economically worrying times (the opposite happens when confidence is high), investors sell stocks because they fear a downturn. But they have to put their money somewhere. So they buy lower-yield but safer “risk-off” investments, such as US Treasurys, gold and mortgage-backed securities (MBSs).
MBSs are bundles of individual mortgages, wrapped up within a bond-like “security” (a tradable financial asset) and sold on a secondary market. And, the more investors want to buy them, the lower the mortgage rate you’re likely to be offered.
Markets in sync
Usually, the flows of money are fairly even across risk-off markets. So you can typically assume that gold and bond prices will go up or down roughly in line both with each other and inversely with falling or rising stock prices.
And the same applied to MBSs. In fact, the relationship between 10-year Treasury yields and mortgage rates was for years so close that many (wrongly) assumed the two were formally linked.
Why the change?
But nobody could make that mistake now. For example, between our report on the morning of November 1 and markets closing on the afternoon of the next business day, those yields climbed to 1.79% from 1.70%. But average mortgage rates edged up by only 2 basis points (a basis point is one hundredth of one percentage point) across those two trading days.
Indeed, on Nov. 21, those yields edged up, even as average mortgage rates moved down.
So why are the MBSs that actually determine mortgage rates drifting apart from risk-off investments generally and those Treasury yields in particular? There are three main reasons:
- Investors are concerned they’re not being rewarded sufficiently for the extra risk they shoulder when they buy MBSs rather than Treasury bonds. In particular, the US Treasury never welshes or redeems its bonds early, making those ultrasafe and predictable. Meanwhile, mortgage borrowers often refinance and occasionally default
- Some are worried about government reform of Fannie Mae and Freddie Mac. On Oct. 28, National Mortgage Professional magazine suggested, ” … we have now seen the implementation of the first steps, some of which have only increased market volatility.”
- The things that spook or please investors in Treasury bonds don’t always apply to mortgage-backed securities
And another factor affects mortgage rates rather than MBSs themselves. Mortgage lenders are distrustful of extreme volatility and often take a wait-and-see stance before adjusting the rates they offer
Those Treasury yields are one of the main indicators (see the “market data” list above for others) we use to make predictions about where rates will head. And, with those tools more unreliable than usual, we sometimes struggle to get our daily predictions right. Until the relationship between rates, yields and other indicators gets back in sync, you should bear that in mind.
“Inverted yield curve” is easy to understand
You’ve probably read a lot of headlines recently about the “inverted yield curve.” But it’s the sort of impenetrable jargon that most of us skip over on the grounds life’s already too short.
But hold on! It’s actually easy to understand. It simply means that short-term US Treasury bills, notes and bonds are giving higher yields than long-term ones. Yes, that’s rare. You usually expect to get a better return the longer you commit to an investment.
It’s also a little scary. Frequently, in the past, when the yield curve has inverted, a recession has soon followed. That doesn’t mean it will this time. But it’s a bit worrying.
Critical yield curve inverted
Any time yields are lower on longer-term bonds than shorter ones, that’s an inversion. But it’s when the 2- and 10-year Treasury yields (the return you get on those US government securities) invert that has proved to be the most reliable — close to infallible — predictor of recessions.
And those two hadn’t crossed the line since June 2007 — until mid-August this year. Since then, they’ve crossed and recrossed it a number of times.
Unless you’re in hiding, you can’t have missed the resulting doom-laden media reports, full of dire predictions. In fact, right now, there are few other noticeable signs of a recession looming. And some say fears are overblown.
What is Brexit?
For the first time since 2016, Brexit was playing a major role in the determination of American mortgage rates during part of October. However, it now seems safe to relegate it to a much less important influence.
Brexit is Britain’s exit from the European Union (EU) after 46 years of membership of the world’s largest trading bloc. A nonbinding (advisory) referendum in June 2016 saw a small majority of voters in favor of leaving. But the simple in-or-out question disguised a vastly nuanced series of issues. And, so far, successive governments and parliaments have found it impossible to identify a formula that most legislators could support.
What looks likely to happen over Brexit
The UK is currently in the midst of a general election campaign, culminating in a vote next week (Dec. 12). And, right now, the incumbent Conservative party has a comfortable lead in the polls.
But the British electoral system means such a lead may not be as decisive as the figures suggest. And there’s no guarantee an electorate that’s as equally divided and partisan as the politicians won’t return another “hung parliament,” meaning one in which no party has an overall majority. That could make the deadlock even worse. And there’s a chance there might yet be a second referendum.
But, for now, the likelihood is that we’ll see an intermission in the long-running Brexit saga while the UK tries to find a way to break its political impasse. It may be early in 2020, if not later, before Brexit affects American mortgage rates again.
Lower rates ahead?
On Sept. 6, CNBC ran a studio interview with Bob Michele, CIO of J.P. Morgan Asset Management. In that interview, Michele predicted that the yield on 10-year Treasurys would hit zero before the end of this year.
On the same day, Lawrence Yun, the National Association of Realtors® chief economist, said he could envisage a new record-low mortgage rate of 3.3% — also before the end of this year.
By all means, take cheer from these predictions. But never forget a remark made by the late Harvard economics professor John Kenneth Galbraith:
The only function of economic forecasting is to make astrology look respectable.
Certainly, the recent pattern of rises and falls suggests an uneven path, even if those prognosticators are ultimately proved right. And, with the New Year looming, they’re running out of time.
Negative mortgage rates
Just don’t expect zero or negative mortgage rates in America anytime soon. Still, they’re not unthinkable within a year or two.
Already, Denmark’s Jyske Bank is offering its local customers a mortgage with a nominal interest rate of -0.5%. Yes, that’s minus 0.5%. However, after fees, that’s likely to be closer to a free or incredibly cheap mortgage than one that actually pays borrowers.
Rate lock recommendation
We suggest that you lock if you’re less than 30 days from closing. Some professionals are recommending locking even further out from closing. And we wouldn’t argue with them.
However, that doesn’t mean we expect you to lock on days when mortgage rates are actively falling. That advice is intended for more normal times.
Of course, financially conservative borrowers might want to lock immediately, almost regardless of when they’re due to close. After all, current mortgage rates remain exceptionally low 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. 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.
Bearing in mind professor Galbraith’s warning, I personally 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
But it’s entirely your decision.
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% 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.