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Will Mortgage Rates Drop in 2020?


Will mortgage rates drop in 2020? Some analysts think so, but there is a lot of confusion. It’s good to remember that news reports tend to focus on short-term interest rates that the Federal Reserve (the Fed) controls, while advertising tends to focus on long-term interest rates – mortgage rates in particular.

As I have written before, the Fed does not directly control mortgage rates, and in fact sometimes they move in opposite directions.

Predictions for 2020

Last year when I wrote my predictions for 2019 interest rates, 30-year fixed mortgages were sitting at about 4.8%, and most analysts were predicting rates to drop in the late winter but then rise back up to the 5% range in 2019. In fact, mortgage rates did drop in the winter, but then kept going lower. Every analyst was wrong, including economists for Fannie Mae, Freddie Mac, the Mortgage Bankers Association, The National Association of Realtors, and The National Association of Home Builders. I was in good company with my predictions.

What happened? Trade tensions slowed economic growth, and worries that it could get worse drove institutional investment money into “safe-haven” bond investments, including mortgage-backed securities. More money chasing the same amount of borrowing means lower interest rates.

The Fed Moved the Cheese

More importantly, however, the Fed did something few people noticed in their July meeting. As I wrote in August, they halted their Quantitative Tightening program early. (Read the article for more information about that.) What happened? Look at the chart below. You can see that at the end of July and the beginning of August – the days after the Fed announcement – interest rates dropped steeply to their lowest level since 2016. Mortgage rates followed as expected.


Interest rates 10/1/18 through present
Rates dropped, then stabilized

The red line in the chart above is the 10-year U.S. Treasury yield. While it is not directly related to mortgages, mortgage rates tend to move more or less in unison with it over time. It is commonly used as a proxy for the direction of mortgage rates because it is the easiest index to track in real time.

The blue line is the Fannie Mae 60-day yield. Most mortgages in the U.S. are sold to Fannie Mae or Freddie Mac. (Yes, even Big Bank, Inc, where you bank, sold your mortgage to Fannie or Freddie.) Lenders know how to price their mortgages because Fannie (and Freddie) publish the yield that they desire to earn on a pool of mortgages. The 60-days means that this would be on loans that the lender expects to deliver to the agencies within 60 days. Think of this as the wholesale mortgage rate that lenders work with on conforming loans.

Related: What is a Conforming Loan and Why Should You Care?

The green line is a backward-look at the mortgage rates borrowers actually locked in the week before, running Thursday through Wednesday.

You’ll notice by looking at the period between August 1st and September 3rd that when market-driven rates (10-year Treasury Bills) stay steady, mortgage rates drop slowly. When the market rates jump up, mortgage rates jump up further, and then stay up for a while. Lenders abhor volatility, so mortgage rates tend to jump up and settle down.

Lenders Change Their Margins, Too

The graph below charts the margin that lenders earn over wholesale interest rates. You’ll notice that when the Treasury Bill is volatile lenders demand a higher margin, but after a while – especially if wholesale interest rates stabilize – margins tend to compress as competition drives mortgage rates lower.

Mortgage margins over wholesale interest rates
The margin mortgage lenders need to earn depends on their costs, their perceived risk, and competition

Looking at the margin over the last two years, you’ll see that when interest rates were fairly steady in late 2018 through the Spring of 2019 the margin remained consistent. When the market went a different direction than expected after the spring of 2019, margins jumped up and fluctuated wildly.

However, as interest rates have stabilized in the last quarter of 2019 (albeit above their August levels) the margin has steadily dropped and become a bit more stable.

Mortgage Rates in 2020

The wild card this year has been news-driven (or tweet-driven) market activity, especially around trade negotiations. Since 2020 is an election year, it seems highly unlikely that this activity will diminish. In the meantime, most economists believe that the economy will continue to slow down in 2020, and possibly even sink into recession. The Fed is unlikely to let that happen, however, in my humble opinion.

Money has to chase something, though. The stock market hit new highs regularly in 2019, rising 20% (so far) from the beginning of the year. Can it continue in an environment where the economy is slowing down? If investors get nervous, more money will pour into bonds as safe-haven investments. This will at least keep rates low, if not drive them down a bit.

Each time we hit new lows (or get close to old ones) the dip lasts only a very short time. This year, for instance, wholesale rates were close to record lows for a month, and the 2019 bottom for mortgage rates lasted only about a week.

Will mortgage rates drop in 2020? All signs point to (slightly) lower interest rates in the late winter / early spring of 2020, but from there it is unclear how long such a dip can continue. If you see such a dip in the early part of the year grab it while you can, and assume that you are going to have that mortgage for a very long time.

Related: How Do You Know When to Refinance?

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
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This article represents the opinions of Casey Fleming, and not necessarily those of C2 Financial Corp. This analysis was prepared with the best information available at the time it was written. Neither Casey Fleming, nor C2 Financial Corp., have any magical insider information about bond markets, real estate markets or mortgage markets that would make economic projections any more reliable than any other source. No warranty is made that the outcome will reflect the projections in this article, and neither Casey Fleming nor C2 Financial Corp. are responsible for decisions that you make regarding your own choices about your real estate or mortgage or those of your clients.

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