Why mortgage rates are increasing in the face of massive stock declines

Under normal circumstances we expect mortgage rates to improve when stocks decline.  You can CLICK THIS LINK to learn why.

However, as we can all attest these are anything but normal circumstances.  Despite the US stock market experiencing some of the biggest sell-offs in history mortgage rates are actually increasing off all-time lows.  Why the change in dynamic between stocks and home loan rates?  I have recorded a special video to explain the four factors which are turning the relationship upside down:

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A special video Rate Update

Given the extraordinary circumstances we are currently experiencing I have prepared a special video ‘rate update’ for today. 

Please take 4 minutes to watch this special message below:


Current Outlook: Floating

Mortgage rates at all-time lows, spread of fear may press them lower

Home Loan Rates

In last week’s update we took a “floating” stance because we thought fear over the coronavirus would continue to grow.  That seems like an understatement now.

Mortgage rates established new all-time lows on Thursday last week and remain at all-time low levels today.

The Coronavirus

The Coronavirus continues to spread across the US and other countries outside of China.

Experts believe more US citizens currently have the Coronavirus than is being reported.The US is still shipping reliable test kits to medical officials around the country.  Once those are deployed I expect the reported numbers of cases to rise significantly.

The spread of the virus will discourage consumers from spending, investing, and generating economic activity.  Therefore, many analysts think this could trigger an economic recession.  This is the primary reason why stocks are faltering and interest rates are falling.

The Fed

Earlier this morning the Federal Reserve cut short-term interest rates by .50% to try and combat the economic fallout from the Coronavirus.

The Fed controls the Federal Funds Rate which is not directly correlated to mortgage rates.  Mortgage rates are the same today as they were yesterday before the Fed cut rates.

The week ahead

It’s the first week of March so we’ll get a fresh jobs report this Friday.  However, the financial markets are not focused on the economic calendar given the significance of the coronavirus story line.

I expect volatility to continue over the course of the next few days and weeks.  The bottom line is interest rates may very well continue to decrease in the weeks ahead.

Current Outlook: Floating

Mortgage rates at all time lows. Might they go even lower?

Home Loan Rates

Mortgage rates are presently at all-time lows which were originally established in 2012 and again in 2016.  Could home loan rates go even lower?

The Coronavirus

Although new cases of the Coronavirus are slowing in China the number of people infected in other countries is growing.  Furthermore, there is fear that some countries are underreporting the true number of citizens infected with the virus.

Fear over the spread of the illness is now having a significant impact on financial markets around the globe.

Impact on Financial Markets

On Monday US & European stock markets fell by ~3% and today they are off over 1%.  Japan’s stock market fell 3.3% on Monday.

When stocks decline it tends to drive capital into the bond market which pushes interest rates lower.  The US 10-year treasury note is now trading at 1.322%, an all-time low) and the yield curve is now inverted.

An article published by Bloomberg reported that unless economic activity resumes 66% of small to medium sized businesses inside China are poised to run out of cash within two months.

Home Prices

According to the S&P CoreLogic Case-Shiller Home Price Index appreciation picked up nationwide at the end of 2019.  The report showed that homes increased by 3.8% during 2019.

With interest rates hitting all-time lows I expect home price appreciation will remain healthy for the foreseeable future.

The week ahead

There is plenty of significant economic data being reported this week.   Specifically, I will be paying attention to New Home Sales (Wednesday), Gross Domestic Product (Thursday), Pending Home Sales (Thursday), and Personal Income (Friday).

However, news regarding the Coronavirus is the primary driver of interest rates at this moment.  If it appears that the illness continues to spread then I expect stocks to continue to falter and mortgage rates to improve further.

Current Outlook: Floating

Mortgage rates remain low despite unfriendly news

Home Loan Rates

Mortgage rates are mostly unchanged from last week despite economic news which has not been rate friendly.

Jobs Report

Last Friday’s all-important jobs report showed that 291,000 new jobs were created during the month of January.  Analysts had been expecting a figure closer to 160,000 new jobs.  

Normally when the jobs report comes in hotter than expected it causes rates to rise but they barely budged following the release.

The Coronavirus

Fear over the Coronavirus may be keeping a lid on mortgage rate increases.  There are now over 40,000 confirmed cases.  

News reports this morning suggest the spread of the virus may be slowing which is positive news for the economy but ultimately may unwind the “flight-to-safety” in the financial markets which has helped interest rates hit recent lows.  

If the spread of the virus begins to decelerate then I expect mortgage rates to increase modestly.

The Fed

Fed Chairman Jerome Powell testified in front of lawmakers earlier today that the Fed was monitoring the Coronavirus outbreak closely but that it was too soon to measure the economic impact it is having.  

The financial markets currently think there is an 80% chance that the Fed will cut short-term interest rates at least once during 2020.  Although the Fed does not directly control mortgage rates the comments they make can influence them.

The week ahead

The weekly economic calendar features plenty of scheduled Fed speeches.  In addition, we’ll see the Consumer Price Index on Thursday as well as Retail Sales and Consumer Sentiment on Friday.  

From a technical perspective I think borrowers have more to lose than to gain so will maintain a locking bias.

Current Outlook: locking

Can interest rates go even lower? A long-term view suggests they can…..

A long-term view of rates

If you took out a mortgage in the 1300s then it’s probably time to refinance.  A new working paper from the Bank of England looks at a trend in global interest rates over the past eight centuries.  

The findings show that interest rates have been trending lower over the past ~800 years.

Should the trend continue then our grandchildren receive interest (negative interest rates) when they borrow money.

Home Loan Rates

Looking at a much shorter-term…. Mortgage rates here in the US remain at very attractive levels despite an easing of geopolitical tensions between the US and Iran over the weekend.

Stocks and home loan rates

Corporate earnings season is upon us.  For the next couple weeks publicly traded companies will release their 4th quarter earnings reports.  

In aggregate, when earnings are stronger than expected it generally causes stocks to rise and hurts mortgage rates and vice versa.  

Jobs Week

Last week’s all-important jobs report came in slightly softer than expectations.  It showed 145,000 new jobs were created in December and the national unemployment rate of 3.5%.  All in all, the report signals continued strength in the economy.

However, looking back over the past few decades every recession has started while the unemployment rate is at cyclical lows.  

The week ahead

This week’s economic calendar is relatively light.  On Thursday we get retails sales and on Friday it will be housing starts and consumer sentiment.  

From a technical perspective mortgage rates are trading in a wide range.  I will be watching the stock market for direction.  If stocks rally then consumers should lock. If stocks trade sideways or decline then consumers can afford to float.

Current Outlook: neutral

Mortgage Rates Improve on Heightened Geopolitical Tension

Home Loan Rates

Mortgage rates are at the best levels in six weeks in response to a rise in geopolitical tensions between the US and Iran.

Geopolitical tension

Last week a top Iranian official was assassinated by a US airstrike.  Iran has characterized the attack as an act of terrorism and has vowed a retaliation.  I hope and pray that diplomatic efforts can ease the tension between the two countries.

However, the fear over a heightened conflict is causing uncertainty in the financial markets and encouraging investors to shift capital out of the stock market into safer havens such as US treasuries and mortgage-backed bonds.

A Flight to Safety

Should tensions continue to escalate then we may see US mortgage rates continue to decline as investors park their money in safer places.

Jobs Week

This week’s economic calendar is fairly light until we get to Friday when the all-important jobs report will be released.  Analysts are expecting 160,000 new jobs created for the month of December.  The previous month saw 266,000 new jobs.

Generally, when the employment report is stronger than expected it is bad for mortgage rates and vice versa.

Closer to home

Here in Oregon job growth in 2019 was slower than the previous six years.  The Bureau of Economic Analysis is predicting slow and steady growth for the next two years.

Outlook

From a technical perspective mortgage rates look like they have more to lose than to gain.  Therefore, I will recommend a locking bias.  However, should tensions between the US and Iran continue to escalate (and I hope they do not) then we should float.

Current Outlook: Locking bias

Home loan rates slightly worse on “phase one” trade deal

Home Loan Rates

Mortgage rates are mostly unchanged to slightly worse compared to last week.  The catalyst which pushed rates higher last week was an announcement pertaining to US-China trade relations.

Phase One

On Thursday, it was announced that the US and China had agreed to a “phase one” trade agreement.  On the announcement the US stock market rallied and mortgage rates increased.  However, after analysts had a chance to read the details of the agreement stocks and rates recovered slightly because the initial plan is less substantial than the markets had thought.

The Fed

Last week the Federal Reserve Open Market Committee met and elected to make no changes to short-term interest rates.  Although the Fed does not directly control mortgage rates their comments can, at times, impact their direction.

The markets currently are not expecting any cuts or hikes to the Federal Funds rate in 2020.

Home Construction

Data released earlier today shows strength for home building in 2020.  According to the Commerce Department housing starts were up 8.5% in October compared to a year earlier.  Furthermore, building permits hit the highest level in over 12 years.

More housing supply should help soften home price appreciation in the near-term.

The week ahead

This week’s economic calendar is relatively light.  I will be watching for existing home sales (Thursday), leading economic indicators (Thursday), and the Personal Consumption Expenditure Price Index (Friday).

From a technical perspective there is more room for mortgage rates to worsen than there is for them to improve.  I will maintain a locking bias this week.

Current Outlook: Locking bias

Mortgage rates worsen slightly following a strong jobs report

Home Loan Rates

Mortgage rates have worsened modestly from last week’s ‘rate update’.

Jobs Report

Last Friday’s all-important jobs report showed that the US economy added 266,000 new jobs in November.  The national unemployment rate ticked down to 3.50%.  The results were stronger than analysts had anticipated, which is bad news for interest rates.

Here in Oregon job growth has slowed but fortunately layoffs remain low.  The main reasons for the slowdown in job growth is lower migration into the state and the aging of our population.

Trade Outlook

As I have written repeatedly over the past few weeks trade seems to be the main driver of interest rates as of late.  When it looks more likely that trade agreements will be reached it causes stocks to rise and pressures interest rates higher.

Earlier today it was announced that Democrats had reached a deal with the Trump administration to approve a new trade agreement with the US and Canada.  Should this get pushed through Congress it may cause mortgage rates to worsen.

There have not been any significant developments between the US & China.

The Technical Outlook

The US 10-year treasury note is currently yielding 1.83% which is slightly above multiple layers of support.  Furthermore, mortgage backed-bonds have drifted below several layers of resistance.  Combined, the technical outlook is not favorable for mortgage rates at the current moment.  There is more room for rates to move higher than there is for them to go lower.

The week ahead

This week’s economic calendar is busy.  Tomorrow the Fed will conclude a normally scheduled monetary policy meeting.  No changes to short-term rates are expected but the comments following their meeting can influence interest rates.

We’ll also get the latest reading on inflation (Consumer Price Index & Producer Price Index) and Retails Sales numbers.  Given the aforementioned technical outlook I recommend locking.

Current Outlook: Locking

Mortgage rates improve on an escalation of trade tensions

Home Loan Rates

Mortgage rates are at the best levels in over a month today thanks to weakness in the US stock market.

Trade Tensions Escalate

Speaking at a NATO summit President Trump commented earlier today that a trade deal with China may not come until after the 2020 election.  Furthermore, he said he may use trade sanctions to punish countries who do not fund a fair share of NATO’s budget.

On the news US stocks declined.  The S&P 500, Nasdaq Composite, and Dow industrials were all down over 2% in midday trading.  Bad news for the stock market is good news for interest rates.

Jobs Report

This Friday we’ll get the latest monthly jobs report.  Analysts are currently expecting +189,000 new jobs to be reported.  A number south of that figure could help push rates back down to 2019 lows.

Locally, job growth in Oregon is slowing but as economist Josh Lehner points out this is mainly due to fewer job hirings, possibly because of tight labor market, rather than layoffs (which is a good thing).

The week ahead

Aside from the employment report the weekly economic calendar is relatively light.  Therefore, I expect mortgage rates to react to sentiment surrounding US-China trade talks and technical trading patterns.

From a technical perspective the yield on the US 10-year treasury note is currently trading at 1.711% which is below several layers of importance.  If yields can close below this level and follow through tomorrow then I expect rates to drift lower.

Current Outlook: floating