Coronavirus has been all over the news these past few weeks. With its spread to the U.S., last week the stock market saw its worst week since the financial crisis. The question is, with mortgage rates already near all-time lows and the Fed recently lowering interest rates, what does coronavirus mean for mortgage rates in the future?
Current Factors Driving Mortgage Rates
When global crises like the coronavirus happen, we typically see investors flood the debt markets and exit stock market positions, known as “flee to safety.” For home-buying or refinancing, this means it’s cheaper for you to buy a home because investors want to buy up relatively safe investments like mortgages.
Investors’ increased appetites have led to some of the lowest home financing rates we’ve seen in years. But if the virus persists, will rates go lower?
What the Fed Interest Rate Cut Means for Mortgage Rates
On Tuesday of this week, the Federal Reserve lowered interest rates by half a point to a range of 1%-1.25% in an attempt to minimize stock market declines made by the coronavirus. While it might be tempting to think a lower interest rate would mean good things for your mortgage rate, let’s take a closer look.
Mortgage rates move based on a few different factors. Inflation, the economy, and treasury yields all have some effect on mortgage rate movement. Fixed-rate mortgages correlate to 10-year treasury yields and the bond market as a whole, but lenders tend to be more conservative when treasury rates are volatile.
The main takeaway is that mortgage rates are not directly impacted by the federal funds rate the Federal Reserve controls. Lower interest rates may actually cause a future increase in mortgage rates.
Why? Well, when the Fed lowers interest rates, it’s an attempt to stimulate the economy. In good economic times, mortgage rates historically rise because the demand for home-buying is strong. Higher rates also help entice investors that are more likely to look for a return in the stock market rather than lower-yielding “risk-averse” investments like bonds and mortgages. With the coronavirus threat, investors may continue to be risk-averse despite the rate cut, but that still doesn’t indicate mortgage rates will drop further. In the 24 hours after the Fed rate cut, the Dow had its second-highest point gain ever, finishing Wednesday with a 4.5% gain, and mortgage rates gained about 0.125% across the board.
Rate movement indicators are not perfect, and they don’t necessarily happen in real-time. But we at Solidify have been around the Federal Reserve rate drop block before. Sometimes all it takes is one piece of good news to send mortgage rates upward.
We believe the time for you to act is right now, before the low rate window closes. Call us if you are looking to finance or refinance a home purchase.
Will Mortgage Rates Drop Lower?
Even with the Fed’s interest rate cut, the threat of coronavirus makes people ask if rates will drop lower. We think no.
Because homeowners can prepay their mortgages or refinance when rates drop, mortgage rates tend to have a higher floor than 10-year treasuries or other debt products that don’t have this “opt-out” feature. So despite the recent descent of the 10-year treasury rate, it’s not likely mortgage rates follow.
We also should keep in mind the role lenders play in all this. Lenders use rates as a way to control loan volume and demand. Given the already low rates, they’re approaching full capacity. With many areas seeing a high volume of new mortgages and refinancings, there’s little incentive to lower rates any further. One of our top lenders became so overloaded, they raised their 30-year by 0.25% the next day despite very little market movement. And remember, lenders risk losing investor interest if they drop rates.
The Bottom Line
We look at mortgage rates at a macro-level. It’s impossible to be certain about these things, but based on current events and our future outlook, we highly recommend taking advantage of today’s low rates. If you’re thinking about a refinance or new home purchase, now is the time to get your financing.
Get started. Give us a call today.