Surprisingly, mortgage rates went up immediately after the Federal Reserve slashed the benchmark interest rate to near-zero on March 15. This was probably just a temporary bounce, and in all likelihood mortgage rates will quickly begin moving downward again. In otherwise difficult times, low mortgage rates will bring cheer to people hoping to buy or refinance
Before discussing current events, it’s worth noting that mortgage rates have been heading south for more than a year; this global crisis will just speed things up. In late 2018, with the Fed’s target interest rate at a post-financial crisis high of 2.50%, the average 30-year fixed-rate mortgage (30-Yr FRM) peaked at almost 5%. After the Fed reversed course and began reducing the target rate, mortgage rates fell simultaneously. On March 4, 2020, one day after the first of two Fed emergency rate cuts in March in response to the coronavirus, the 30-Yr FRM was at 3.29%.
Why did the 30-Yr FRM bounce back to 3.65% immediately after the Federal Reserve’s second emergency rate decision on March 15, which slashed the Fed rate to near-zero? There are a couple of plausible explanations:
1. Lenders have temporarily hiked rates to deal with the sudden explosion in refinance demand (which itself is a result of low rates).
2. The US 10-Year Treasury Yield, which usually correlates with the Fed target rate – and is the thing lenders actually look to when calculating fixed mortgage rates – bounced up after the March 15 Fed decision. Without wanting to get too off-topic, this is because Congress’ approval of a large-scale stimulus package will require lots of government debt to be issued, in the form of U.S. Treasuries. (This article from Marketwatch is useful for anyone wanting to understand the relationship between the Fed, treasuries, and mortgage rates in more detail).
Will the situation last? Probably not. The 10-year U.S. Treasury Yield actually began to fall again shortly after the initial bounce, which means the average 30-Yr FRM will almost certainly have fallen by the time Freddie Mac published the next official data. Moreover, lenders will probably bring rates back down once they’ve worked through their backlog of applications.
How low can mortgage rates go? It’s difficult to predict, given the 30-Yr FRM hit an all-time low in the days before the Fed’s big decision. But it’s worth noting that 5/1 adjustable-rate mortgages, which are more influenced by the Fed’s target rate than by the 10-Year Treasury, are at 3.11%, well above the 2.58% recorded when the Fed last set near-zero rates following the financial crisis.
That means the best deals in the coming months could come from adjustable-rate mortgages.
If you’re stuck in self-isolation at home and find yourself searching for properties to purchase, then it’s important to consider two things: home prices and mortgage rates.
We’ve already discussed why mortgage rates are likely to fall. Given the unprecedented nature of the coronavirus pandemic, house prices are a lot more difficult to predict. On one hand, analysts like Capital Economics are predicting a 35% fall in annual home sales due to “increasingly restrictive measures on people’s movement and an imminent surge in unemployment.” On the other, the Home Buying Institute believes the housing marketing won’t crash, although home prices might drop in some cities – especially expensive cities like New York, D.C., San Francisco, and Los Angeles.
House prices are virtually impossible to predict at the best of times, and doubly so at a chaotic time like this. However, what we can say is that if you’re in the market for a house, you have two options:
- Lock in the near-record low rates on offer and buy now; or
- Hold your breath and hope for lower rates and lower home prices later this year.
The second option is a gamble – albeit a gamble with potentially big rewards.
If you’re thinking about refinancing an existing mortgage, you’re not alone. According to the Mortgage Bankers Association, refinancing applications are up more than 400% from one year ago as home buyers try to cash in on the near-record low rates.
According to Black Knight, a company that collects data on the mortgage industry, the number of American ‘refinance candidates’ (people with 720+ credit score and at least 20% home equity who could cut their current interest rate by at least 0.75% with a refi) exploded from fewer than 8 million in mid-January to approximately 14 million at the start of March.
If the average 30-year fixed-rate mortgage falls to 3% - which is a distinct possibility – there will be more than 19 million refinance candidates. But if mortgage rates somehow climb back toward 4%, the number of refi candidates will be less than 7 million.
Nobody can say for certain what mortgage rates will look like in a few months, but the evidence suggests they are still trending down. Putting aside any anxieties we’re all feeling over the current global pandemic (as hard as that is), now is a great time to be in the market for a new mortgage or refinance.