*Information accurate as of 03/27/20
Q. Why are mortgage rates bouncing around so much?
A. The average rate on a 30-year fixed rate mortgage fell to 3.50% for the week ending March 27, down from 3.65% a week ago but higher than in the first part of March.
The measures that are typically correlated with mortgage rates—namely the 10-year Treasury yield—are becoming less helpful for forecasting where rates will go. There is a lot more variation in the market, with rates varying from lender to lender, depending on capacity to handle applications.
Q. What do the volatile mortgage rates mean for buyers?
A. It is more difficult now to predict which direction mortgage rates are heading. In addition, locking in a mortgage rate is more complicated than it was last month, as lenders are increasingly asking for loan approvals and appraisals to lock in.
Q. I heard the Federal Reserve dropped the federal funds rate. Is this the same thing as the mortgage rate?
A. The federal funds rate, which is controlled by the Federal Reserve and is a very short-term interest rate, is not directly tied to mortgage rates. This rate is the interest rate at which banks and other financial institutions lend money to each other, usually overnight. The 30-year fixed mortgage rate is more directly impacted by long-term factors, such as 10-year and 30-year Treasury yields. Mortgage rates are also determined by other factors, including the inflation rate, the pace of job creation, and whether the economy is growing or shrinking.
Therefore, while mortgage rates and the federal funds rate sometimes move in tandem, and the lower fed rate will eventually impact longer-term interest rates, it is not always possible to predict how a federal funds rate cut will impact 30-year mortgage rates in the near-term.
Q. What does all of this mean for homeowners and buyers? Are mortgage rates going to decline?
A. Mortgage rates will probably either stabilize or continue to decline in the near-term. The action by the Federal Reserve to purchase billions of dollars in mortgage-backed securities (MBS) will help stabilize and likely lower mortgage rates.
However, there is a big constraint in terms of lender capacity to service loan applications. Lenders are facing a pipeline of applications—mostly refinance applications—and some lenders are raising rates to slow the number of people applying for home loans, giving them time to work through the backlog.
Q. Assuming mortgage rates do stay low or even fall further, what will be the impact on the housing market?
A. Low and falling mortgage rates tend to be positive for the housing market, making it relatively less expensive to borrow for a home purchase. However, the relationship between home sales and mortgage rates has been atypical over recent months. Rates have been so low for so long, which means that the cost of borrowing is not what is keeping potential home buyers out of the market. Rather, an insufficient supply of inventory has had a bigger impact on the housing market than mortgage rates. In fact, the falling mortgage rates in recent weeks have spurred unprecedented levels of refinancing activity, not home purchase activity. Increased refinancing activity could actually make it harder for would-be home buyers as more homeowners decide to keep their homes off the market.
Q. What should I tell clients about mortgage rates?
A. While it is likely that rates will fall further in the coming weeks, a drop is not a foregone conclusion. There may be little value in advising clients to wait to purchase a home to achieve lower rates when the bigger challenge they likely face is finding a home at all. Therefore, if your clients are otherwise ready to purchase (e.g., on good financial footing), then there does not seem to be a good reason for putting off that purchase. In fact, well-positioned buyers could benefit from less competition for homes.