Don’t Expect Mortgage Rates to Drop Much Further

(Bloomberg Opinion) -- On March 17, bond markets were freaking out. The benchmark 10-year Treasury yield had soared 38 basis points, entirely reversing the stunning 34-basis-point drop from the previous day. High-yield credit spreads had just surpassed their early 2016 peak to reach the widest in nearly a decade. Fixed-income exchange-traded funds were in an “illiquidity doom loop.” .Some 1,600 miles away from Wall Street, a friend of mine in Houston was perplexed, too..We hadn’t talked in months, but he reached out that day because he wanted to refinance his mortgage. The issue: He was having trouble making sense of banks’ quoted interest rates. They offered 3.125% on March 9, a few days after the Federal Reserve cut short-term interest rates by 50 basis points in its first emergency action since 2008. Correctly anticipating that the central bank would soon have to ease further, he waited. And yet the quotes went up, stuck at 3.5%..“Do you think mortgage rates will go down, aka do you think I should lock? 10Y Treasury yield is lower today than it was late last week,” he texted. “I’m a bit disappointed rates didn’t go down as I thought with the Fed rates down near 0.”.I told him what I knew at the time: That refinancing applications had soared to the highest since 2009, creating a backlog and allowing banks to keep rates sticky; that residential mortgage rates aren’t exactly driven by the Treasury curve but rather the to-be-announced market; and that the rampant market volatility was probably causing chaos somewhere in the chain of borrowers and servicers and lenders. (Bloomberg News would soon report that interest-rate hedges forced margin calls upon regional dealers and lenders.).He went ahead and locked in his mortgage rate at 3.375% after what he described as “truly a roller-coaster ride.” .Refinancing home loans at ever-lower rates has been nothing short of an American right over the past 38 years during the raging bull market for bonds. Mortgages make up an overwhelming majority of the $14.3 trillion in U.S. household debt, standing at $9.71 trillion as of March 31, according to the New York Fed. Sure, interest rates on savings accounts are once again veering toward zero, in yet another a punishing blow for savers. But on the flip side, to paraphrase “Arrested Development,” there’s always money in mortgage refinancing. .Or perhaps not. While the Fed’s various lending programs have calmed markets and halted margin calls, mortgage rates have gone nowhere. Rates for 30-year U.S. mortgages average 3.24%, compared with 3.29% on March 5, according to Freddie Mac. The Mortgage Bankers Association’s U.S. 30-year contract rate is 3.41%, compared with 3.47% on March 6, while Bankrate.com’s measure of the average 30-year rate is 3.54%, compared with 3.55% in early March and well shy of the all-time low 3.32% in September 2016. While it’s true that 10-year Treasury yields are also little changed in recent months, it stood to reason that the yawning gap between the two wouldn’t be a permanent part of the mortgage market..However, at least by some measures, the benefit of benchmark interest rates near record lows is failing to reach U.S. homeowners to an unprecedented degree..Consider this: During the worst of the financial crisis, when markets were collapsing, the difference between 30-year mortgage rates and 10-year Treasury yields remained above 250 basis points for 10 weeks, from November 18, 2008, through January 28, 2009, before reverting back to a more historically normal level. The current stretch above 250 basis points has lasted 12 weeks and isn’t especially close to falling below that threshold, which has otherwise never been breached in data going back to 1998..It’s not clear what, if anything, can change this dynamic. In mortgages, Mark Fleming, chief economist at First American Financial Corp., told Bloomberg News’s Prashant Gopal in March that rates probably can’t go any lower than the “high 2s” because fixed costs in the transaction, like paying the servicer and the originator, typically amount to 1.5% to 2%. Yes, with strong credit, a large down payment of 20% or more, and a stable, well-paying job, an individual can lock in a sub-3% 30-year mortgage rate. But on the other side, U.S. home-loan delinquencies surged by 1.6 million in April, the largest one-month increase ever, data compiled by Black Knight Inc. showed last week. That’s one reason why taking past spreads and applying them to the current market simply won’t work. At the end of the day, no lender will put their money at risk if they’re locking in a meager gain at best and a steep loss from forbearance or repossession at worst..As for Treasuries, the minutes of the Federal Open Market Committee’s April meeting released last week revealed that at least a few members were starting to think about some form of yield-curve control in short- to medium-term maturities later this year if the economy is still in jeopardy. That would seemingly keep 10-year yields pinned in their current range of 0.54% to 0.78%. Signs of a stronger-than-expected recovery would presumably lift long-end yields and potentially mortgage rates along with them..For now, inertia in the two markets is hitting the wallets of Americans across the country. Yelena Shulyatyeva of Bloomberg Economics calculated in a recent report that a 1 percentage point drop in mortgage rates, from 3.5% to 2.5%, would lower the average monthly payment on a median-priced house to $893 from $1,015. When communities are doing all they can to support shuttered small businesses, an extra $100 or so a month for each household could go a long way. Instead, she concludes, “mortgage-rate stimulus may be a thing of the past.”.Like most things related to the coronavirus pandemic, it will take months, if not years, to get a sense of how this affects the economic recovery. So far, the housing market outside of refinancing is at a relative standstill. Sales of previously owned homes in the U.S. fell in April by the most since mid-2010, according to data from the National Association of Realtors. However, the median home price increased 7.4% from a year earlier, while inventory fell to the lowest ever for any April. The equilibrium among supply, demand, price and interest rates coming out of this crisis has yet to be reached..Still, if the first five months of 2020 are any indication, waiting around for a rock-bottom mortgage rate might end up being costly, and possibly never happen. In Houston, my friend says his neighbor locked in a 2.65% rate for 15 years before the Fed’s first March action. He’s disappointed he didn’t get the most optimal rate but acknowledges no one can be a perfect market timer. These rates, while seemingly high relative to the trillions of dollars of negative-yielding debt, are still among the lowest they’ve ever been. That’s a bit of certainty in an uncertain world..This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners..Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder..©2020 Bloomberg L.P.

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Don’t Expect Mortgage Rates to Drop Much Further

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