A Look Back at the Last Three Weeks in Mortgage Rates
MARKET UPDATE AS OF 3/25/20
The last three weeks have been quite a rollercoaster in many ways. As it relates to the mortgage industry, we have seen massive volatility with rates over these last three weeks. If you think back to February – we were in mortgage heaven; rates came down, the refinance market was booming, the purchase market was hot, and we were able to help tons of clients see if they could save money. Things were great.
And then the volatility hit as coronavirus started impacting the markets. The last two weeks we have gone from rates in the low 3’s on Monday to rates over 4% by Friday. This happened two weeks in a row. And it happened without people really knowing about it.
Let’s Take A Look at Why
Here’s what typically happens in the mortgage backed securities market: when the stock market sells off, investors sell equities, which have to go somewhere. Historically, investors take money out of equities and put them in bonds, a safe place. As more money pours into bonds, mortgage rates go down.
However, this didn’t happen. The entire market panicked. So much so that not only did investors sell stocks – they started selling bonds, crypto currency, gold, you name it. It basically became a cash grab for everybody.
So, the only way that the mortgage backed securities become an attractive investment again is by offering them at higher rates. Rates started to go up because investors were trying to find buyers in the mortgage-backed securities market. However, there were no buyers out there. This caused uncertainty among the large investment firms, so rates shot up. In fact, rates went up in a week, what they normally could go up in a year.
Now For Some Good News
The Fed stepped up. They announced on Monday that there will be an unlimited buying of mortgage backed securities, which will likely keep mortgage rates low. The Fed is going to buy $75 billion worth of treasuries and $50 billion of mortgage-backed securities per day, every day this week. This will create a massive supply of money to buy all these mortgage-backed securities and it will keep rates down. For example, because of this, rates went from the mid 4s to the low 3s in just a few hours on Monday. There will likely be some volatility, but I would predict that rates will stay low.
By doing this, the Fed stated – although the investors are uncertain, we believe in the US economy and in the US housing market – we’ll buy it all.
The Fed and Mortgage Rates
Now, mortgage rates aren’t directly impacted by the Fed so why would mortgage rates go up? Mortgages are an asset. They are an investment. When rates went up, people stopped buying mortgage bonds from the US because of the economic uncertainty brought in by coronaviurs. Common doubts could be: are people going to start to default on their mortgages? Are they going to be able to pay their mortgages if they are unemployed or making less money?
So you have all of these mortgages that, for the last 10 years, have had perfect credit, have been income verified, and now all of a sudden, the people that are paying these mortgages might not be on solid footing. Now you have to price in higher risk, and higher risk can only be priced in by higher rates. That is why mortgage rates went up and it created some uncertainty last week.
What’s Ahead?
For starters, we need confidence to come back in the market and that probably won’t happen until we get some good news on coronavirus. I also think that housing is going to help the recovery after this coronavirus passes. Remember, this is not housing related crisis – last time was – but you cannot compare the two. This is not financial crisis either – it’s turning into one because of the virus – but the last recession we had was purely due to housing, bad mortgages, bad everything. The financial system pretty much collapsed.
Remember that our economy was booming just last month – the stock market was at all-time high, income and wages were up, home appreciation was up, unemployment was way down, and the US dollar was strong.
Because of that, I think we will have a fast recovery when this is over, we just don’t know how long that’s going to be. What’s reassuring is the fact that the government is acting very seriously and fast. It would be great to see if they can come together and work on a package that’s going to help our entire country – small businesses, consumers, big businesses, everyone. The more people they help the better so we can all come out of this together.
Sources
https://www.newyorkfed.org/markets/opolicy/operating_policy_200323
https://www.washingtonpost.com/business/2020/03/23/fed-unlimited-credit-coronavirus/
https://www.cnn.com/2020/03/24/politics/congress-vote-coronavirus-economic-stimulus/index.html