It’s now closer to the time when holidays and days off are further in the rear view mirror and it’s back to the standard routine. Investors are back in the markets packing their portfolios with stocks, mutual funds and bonds and analysts are moving back in the guessing game as to the state of the current economy as well as where we might be a few months down the road. With all this forecasting, how will it affect your mortgage rate?
It indeed has been interesting to follow comments by the Federal Reserve Chair Powell going back to last fall when Powell clearly stated we could expect to see at least two more rate increases in 2019 but recently backpedaled a bit and said two such moves aren’t guaranteed but instead the Fed will keep a close eye on the economy. Something the Fed already does, but that’s where we are today.
Will This Affect my Mortgage Rate?
You’ve read on this blog several times that while the Fed doesn’t directly affect your traditional 30 year fixed-rate loan there is an impact of sorts. When lenders set their interest rates each day, they refer to various indices. The most common mortgage program by far for example is the 30 year fixed rate conforming loan. The mortgage rate for these programs are derived from a specific mortgage bond. There are two such bonds issued by Fannie Mae and Freddie Mac. And like all bonds, when the price of the bond goes up, the yield, or the interest on the bond, falls.
In general bonds don’t provide that much of a punch as it relates to the value of any particular portfolio but that’s not the strategy when investing in bonds. Instead, bonds are purchased as a safety valve. When someone buys a bond that individual knows in advance what that bond is worth. The yield is guaranteed. But the return on bonds is rather paltry compared to a highly performing stock. But that highly performing stock can also “turn south” and fall in value and even go to zero should the issuing company file for bankruptcy.
In short, when the economy is on a tear or at least investors think so, more money will be put into the stock market to take advantage of future returns. When investors think the economy is slowing down or soon will be, more money will be pulled out of stocks and into the safety of bonds. Like any other commodity, when there is more demand for a product the price will go up. When the price of bonds goes up due to higher demand, the yield will fall. That’s why when the economy is reporting some rather sluggish numbers, mortgage rates begin to soften.
Okay, that said, what will mortgage rates look like over the course of the next six months? How will Q2 mortgage rates stack up against Q1 mortgage rates? After having nearly completed the first month of Q1, we’re getting a glimpse of what we might see in the future. The stock market has been relatively stable and has been over the past several weeks. Yes, we’ll see swings of maybe 200 or 300 points either way and while that indeed is a respectable amount, compared to the Dow currently around 24,500 it’s relatively small. But it does seem that one day markets will be up while the next day they’re down. And when equities are on a see-saw so too are interest rates. Consumers might see a slight increase in rate from one day to the next but just as likely to see a correction the following day.
The fact is there are no solid signs in the economy that everything is fixed, consumers are spending the money they have and factories are running at capacity. Instead, we’re sort of in a holding pattern. The economy is doing well but not so much as to scare investors thinking inflation is just around the corner. We think Q1 will show little movement in rates. For Q2, that’s a bit harder to forecast but many analysts think the economy will get back on solid footing over the next few weeks making Q2 look like a good bet in stocks and mutual funds. If that’s true, then mortgage rates heading into the summer will be higher than they are today.
If you’re thinking of buying a home now or refinancing and you’re waiting for rates to fall a little more, it might very well be a long wait.