March 16, 2020
Trying to predict what interest rates will do is similar to predicting the weather. Brokers know that the best that the average person can do is speculate. The best course of action is typically to listen to “experts,” whether in weather or the economy. And in the last week or two we’ve seen that even the experts are wrong. Even with all of their expertise, education, tools, and access to facts and information, economists still sometimes get it wrong.
The emergence of Covid-19 (coronavirus) is something that no one saw coming. The coronavirus has wreaked havoc not just in science and healthcare, but also in the world marketplace. Last year and into the first few months of 2020 saw more than a 1.5 percent decline in long-term U.S. rates, with the majority coming over the last 30 days due to the coronavirus. Governments and banks around the world responded to the coronavirus crisis by lowering interest rates in an effort to stave off a potential economic crash.
There have been numerous events in recent history that have played a role in interest rate movement. Some, like Brexit, were unique and specific. Others, such as housing starts, government spending, emerging markets, and unemployment rates, were more garden-variety events that can occur at any time but are still extremely difficult to predict.
Our brokers have seen that U.S. mortgage rates have risen to the highest level in months despite recent Federal Reserve interest rate cuts, complicating the central bank’s efforts to stimulate the US economy as the spread of coronavirus decreases business activity. The costs to consumers are increasing because of a logjam in mortgage-backed securities (MBS) market, where most US home loans are bundled into securities guaranteed by Fannie Mae and Freddie Mac. Yields tend to track those on the 10-year Treasury note, but not recently. As the Fed has lowered rates in recent weeks, consumers have rushed to refinance mortgages, flooding the market with MBS. However, as the coronavirus has spread, banks and brokers that act as intermediaries in the market have struggled to sell the bonds.
The market is telling the Fed that if it doesn’t intervene more, we are moving away from being a functional market. Mortgage rates have jumped. The Fed’s reductions in its policy rate are no longer translating into lower mortgage rates. Will a dramatic cut expected at its March 17-18 meeting have the customary stimulative impact? Not if Freddie, Fannie, broker-dealers, and investors are already at capacity. If they stop buying, prices will drop and mortgage rates will go higher. We’ll see if the Fed steps into the market directly and buys more MBS, relieving some of the pressure until things stabilize.
Most of Orion’s brokers are recommending that borrowers act now rather than speculate about rates dropping further. When markets change dramatically due to global challenges such as coronavirus, it’s always a signal to pay attention and take advantage of the drop that may occur.