What’s driving current mortgage rates?

Average mortgage rates actually inched down yesterday, though only by the smallest measurable amount. Indeed, the fall was so tiny that many lenders didn’t bother adjusting their rate sheets. Still, our prediction was a little off. We said they’d probably be unchanged or “only slightly higher.”


What happened to cause the fall, which halted the strong upward momentum apparent at the end of last week? CNBC suggests the U.S.-China trade talks may be to blame. It says investors are beginning to think the final deal “may not be as strong as the Trump administration was expecting.”


The data below the rate table are mostly indicative of mortgage rates holding steady or being somewhat higher in the short-term.


Local Movings

Financial data affecting today’s mortgage rates

First thing this morning, markets looked set to deliver unchanged or moderately higher mortgage rates today. By approaching 10:00 a.m. (ET), the data, compared with this time yesterday, were:

  • Major stock indexes were all lower soon after opening, though only a little (slightlybad for mortgage rates)
  • Gold prices inched down, standing at $1,284 an ounce compared to yesterday’s $1,285. As recently as last Wednesday, they were up at $1,327. (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 yet again at $57 a barrel (neutral for mortgage rates because energy prices play a large role in creating inflation)
  • The yield on ten-year Treasuries edged down to 2.73 percent from yesterday morning’s 2.75 percent. Although that sounds good, it’s actually bad for borrowersbecause that change reflects yesterday’s fall and the yield was heading upward first thing. Mortgage rates tend to follow Treasuries
  • CNNMoney’s Fear & Greed Index inched down to 66 from 69 out of a possible 100. So it remains firmly in  “greed” territory. Still, today’s move is slightly better 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 something big intervenes during the day, it looks likely mortgage rates will be the same or a bit higher this evening.

Rate lock recommendation

We saw three consecutive days of rises at the end of last week. But yesterday’s tiny fall suggests they might have been a blip rather than the start of a trend. So we might still be in a period when markets are drifting without much direction.

As importantly, don’t forget there’s plenty of potential for bad news in today’s headlines that could send those rates back down. In particular, any escalation in tensions between India and Pakistan could see a significant fall in mortgage rates.  And, as we saw yesterday, those US-China trade talks remain a source of concern. CNBC was reporting earlier this morning that this is still the case: “Market players are focused on U.S.-China trade developments with mixed messages on the progress of talks between Washington and Beijing over the last few days.” It went on to mention continuing concerns, raised in a New York Times article yesterday,  that the deal might “do little to address key structural issues.”

Still, we’re holding our nerve for now and continuing to suggest that you lock if you’re less than 30 days from closing. However, you might think that too conservative, and we wouldn’t blame you if you gambled on more falls during that time.


What’s going on this morning?

Both this morning’s releases of economic data were published at 10:00 a.m. (ET), making them too close to our deadline for us to assess market reactions. They were both better than expected, with new homes sales significantly so.

So, if you’re still floating, do remain vigilant. 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

There are fewer items on this week’s economic calendar than last. However, employment data, out on Friday, are always capable of moving markets. Other outcomes are more likely to fuel or slow existing market momentum (if any builds) than generate much of their own. However, any report can be disruptive if it contains sufficiently shocking results — whether good or bad.

This morning’s economic data were better than expected.

Markets tend to price in economists’ consensus forecasts (we 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. 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.

  • Monday: December construction spending (actual -0.6 percent; forecast +0.3 percent)
  • Tuesday: December new home sales  were much better than expected (actual 621,000 units; forecast 576.000 units) and February’s ISM non-manufacturing index for business activity was also better (actual 59.7 percent; forecast 57.4 percent) from the Institute for Supply Management
  • Wednesday: December’s trade balance (forecast -$57.8 billion). ADP employment figures can also be important as a predictor of how Friday’s official payroll figures will turn out
  • Thursday: weekly jobless claims (224,000 forecast), productivity for Q4 2018 (forecast +1.7 percent)
  • Friday: official employment data for February, including nonfarm payrolls (forecast +180,000) and average hourly earnings (forecast +0.3 percent). Plus January housing starts (forecast: 1.222 million annualized)

MarketWatch’s economic calendar remains 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.


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