Just when you thought all hope was lost, mortgage rates appear to be going down again.
It’s been a very tough start to 2021 with regard to mortgage rates, as the popular 30-year fixed climbed from around 2.75% to 3.35% in the span of about 60 days.
This was clearly an unwelcome development for both prospective home buyers and existing homeowners looking to save via refinancing.
It has eroded purchasing power, which was already dwindling thanks to rapidly appreciating property values, and has pushed millions “out of the money” for a refinance.
But now it seems as if things are beginning to shift to the better, which could reopen the refinance conversation and/or change your home buying presets.
The Mortgage Rate Trend Has Not Been Our Friend Lately
Just take a look at this chart from Optimal Blue, which uses real-time lock data from approximately 35% of the mortgage market.
It tracks conforming 30-year fixed mortgage rates, which are home loans backed by Fannie Mae and Freddie Mac, the most common loan type out there.
As you can see, 2021 started off with a bit of a bang, followed by an even bigger bang in February, which continued to worsen all throughout March.
The 30-year fixed seems to have peaked around 3.353% in late March, and since then has begun to trickle lower.
Today, conforming 30-year fixed rates are closer to 3.287%, which means borrowers might be able to get a rate about an eighth of a percent lower (.125%).
So instead of say 3.375%, 3.25%, or maybe even 3.125% depending on the lender and the closing costs involved.
While not a great deal better yet, it might mark the beginning of a period of downward pressure on rates, which seemed like an impossibility just a week or so ago.
Why Did Mortgage Rates Go Up?
- Mortgage rates tend to increase when good news happens
- We’ve seen the COVID situation improve markedly this year
- And recent jobs reports have been pretty positive as well
- This is enough to push interest rates higher, especially since they were so low to begin with
The increase in mortgage rates during the first quarter of 2021 was driven largely by an improving economic picture, coupled with good news related to COVID-19.
We’ve seen relatively positive jobs reports and news of millions of Americans receiving their vaccinations, both of which signal a return to normality.
Those developments also explain why the stock market has reached new all-time highs at a time that seems so uncertain.
Ultimately, when things look/get better on the wider economic front, stocks go up and bond prices fall.
When bond prices fall, their yields go up, and so do interest rates. The 10-year Treasury tracks 30-year mortgage rates the best because it attracts similar investors.
It started the year around 1% and surged to nearly 1.75% before beginning to fall in the past couple weeks.
Long-term fixed mortgage rates followed suit, which explains the movement you might have seen over the past few months if shopping for a home loan.
But now we’re beginning to see a reversal, with 10-year yields now down to around 1.65%. It’s not a huge move lower, but any move lower is more than welcome news at the moment.
This counters the rather hilarious unsolicited phone call I received from an unnamed loan officer yesterday warning me that rates would be back to the 4-5% range this summer!
Why Might Mortgage Rates Move Lower?
- First we may have simply overshot the mark and a small correction is in store for rates
- Fewer mortgage applications means lenders may have to lower rates to attract more business
- The Fed has continued to signal a very accommodating interest rate environment for 2021
- Who knows what surprises are in store for 2021 that could dampen the mood rather quickly
So we have an idea of why mortgage rates went up, but why might they move lower?
Well, I often compare mortgage rates to stocks and other investments, which can change in value over time.
One day, stocks might go up, and the next day they may fall. When we broaden the time horizon, we may see long periods where the stock market rises or falls.
It’s not uncommon to get complacent and watch stocks rise day after day with the expectation that they’ll increase again tomorrow.
This is kind of how things were going for mortgage rates, which appeared to keep moving lower and lower, and even lower after that.
In fact, there were 16 record lows set for mortgage rates in 2020, and one new record low set during the beginning of 2021.
This alone could explain why rates all of a sudden took off like a bottle rocket.
But that’s generally the worst time to panic and lock in your rate, just as it is often the worst time to sell when stocks experience a bad week.
Often, it’s better to remain calm, do nothing, and wait for things to stabilize again.
Those who panicked may have just accepted a higher mortgage rate, while those who chose to float their mortgage rate may have been rewarded for their patience.
Now as to why rates could move lower, part of it could just be cyclical, similar to the stock market, with the first quarter super bad for rates.
We may have simply overshot the mark, and so a small correction might be taking place to get rates back to prior levels (or at least somewhat closer to them).
At the same time, mortgage applications have dropped a ton lately, with volume down for the past five weeks in a row, per the Mortgage Bankers Association (MBA).
In other words, they may have been operating with wider margins when rates were super low, but now they’re willing to make less per loan, knowing competition is a thing again.
That could explain why I’m receiving random calls to refinance my mortgage from unknown phone numbers, complete with a fear-mongering sales pitch.
Also note that mortgage rates tend to be highest in the first half of the year, and then improve in the second half, especially during winter.
Lastly, there are a lot of unanswered questions regarding the ongoing pandemic and the supposed economic recovery taking place, not to mention the millions of borrowers in mortgage forbearance plans.
All of these issues, along with a very accommodative Fed that continues to buy billions in agency mortgage-backed securities each month, could lead to lower mortgage rates over the next several months.
That being said, it’s not as if rates are high at the moment, they’re just not at all-time lows anymore. So don’t get too greedy.
Read more: 2021 Mortgage Rate Forecast