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U.S Mortgage Rates See Rates Rise as Lenders Price in Risk Amidst the Economic Uncertainty

U.S mortgage rates rise, while Treasury yields fall as lenders begin to price in risk premiums amidst the economic uncertainty.
Bob Mason
Mortgage application loan agreement and house key

Mortgage rates moved northwards in the week ending 23rd April, with mortgage rates up just twice in 5-weeks. In the previous week, mortgage rates had fallen by 2 basis points to 3.31%.

While the downward trend failed to continue, 30-year-fixed rates remained close to record lows.

Compared to this time last year, 30-year fixed rates were down by 87 basis points.

30-year fixed rates were down by 161 basis points since November 2018’s most recent peak of 4.94%.

Economic Data from the Week

Economic data was on the heavier side in the week. Key stats included the weekly jobless claims and April prelim private sector PMI numbers.

Both sets of numbers disappointed. In the week ending 17th April, initial jobless claims increased by another 4.427m. Yet another jump in unemployment sent the number of unemployed hurtling to levels last seen in the Great Depression.

Things were not much better across the services sector, with the lockdown sinking the PMI from 39.8 to 27.0 in April.

The manufacturing sector contraction was less severe, with the PMI falling from 48.5 to 36.9 but it was of little consolation.

From the housing sector, March existing home sales slid by 8.5%, with new home sales tumbling by 15.4%. There had been hopes of a bounce-back in housing sector activity, supported by current mortgage rates. The surge in unemployment, however, raises some concerns over the near-term outlook.

Economic uncertainty, stemming from particularly dire economic data led to a fall in 10-year Treasury yields in the week.

The uptick in mortgage rates, however, had less to do with U.S Treasury yields and more to do with the setting of rates by lenders. Lenders have begun to price in a risk premium into mortgage rates that have led to a break in the correlation between yields and mortgage rates.

10-year Treasury yields also fell in the week in response to WTI’s May Futures sliding into negative territory early in the week.

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Freddie Mac Rates

The weekly average rates for new mortgages as of 23rd April were quoted by Freddie Mac to be:

  • 30-year fixed rates rose by 2 basis points to 3.33% in the week. Rates were down from 4.20% from a year ago. The average fee remained unchanged at 0.7 points.
  • 15-year fixed rose by 6 basis points 2.86% in the week. Rates were down from 3.64% compared with a year ago. The average fee held steady at 0.7 points.
  • 5-year fixed rates fell by 6 basis points to 3.28% in the week. Rates were down by 49 points from last year’s 3.77%. The average fee held steady at 0.3 points.

According to Freddie Mac, mortgage rates have stabilized over the last few weeks. The markets continue to search for direction amidst the doom and gloom of the economic data.

While both fiscal and monetary policy support has delivered upside to the financial markets, Freddie Mac sees a deep economic contraction weighing ‘amidst the uncertainty about the recovery formation’.

Mortgage Bankers’ Association Rates

For the week ending 17th April, rates were quoted to be:

  • Average interest rates for 30-year fixed, backed by the FHA, decreased from 3.45% to 3.33. Points remained unchanged at 0.19 (incl. origination fee) for 80% LTV loans.
  • Average interest rates for 30-year fixed with conforming loan balances remained unchanged at 3.45%. Points also remained unchanged at 0.29 (incl. origination fee) for 80% LTV loans.
  • Average 30-year rates for jumbo loan balances increased from 3.80% to 3.81%. Points increased from 0.23 to 0.34 (incl. origination fee) for 80% LTV loans.

Weekly figures released by the Mortgage Bankers Association showed that the Market Composite Index, which is a measure of mortgage loan application volume, decreased by 0.3% in the week ending 17th April. In the week prior, the Index had increased by 7.3%.

The Refinance Index decreased by 1% and was 225% higher than the same week a year ago. In the previous week, the Index had risen by 10%.

The refinance share of mortgage activity decreased from 76.2% to 75.4% in the week. In the week prior, the share had increased by 74.2% to 76.2%.

According to the MBA:

  • A marginal fall in refinance activity was offset by a 2% increase in purchase applications.
  • In spite of the weekly gain, the Purchase Index remained close to its lowest level since 2015 and was down by 30% year-on-year.
  • Some buyers and sellers have delayed decisions as a result of the pandemic-related economic stoppage. As a result, inventories and buyer traffic were on the slide, leading to existing home sales falling to their slowest annual pace in almost a year.

For the week ahead

It’s another relatively busy week for the Greenback.

Key stats include April consumer confidence figures, 1st quarter GDP numbers, and the weekly jobless claims figures.

We would expect inflation and trade data to have a muted impact in the week.

While the stats will provide some direction, the FED’s monetary policy decision on Wednesday will be the key driver.

The markets may not be expecting another move just yet, but the markets will expect some forward guidance in the press conference…

Away from the economic calendar, COVID-19 news and updates will be in focus along with crude oil prices…

On the geopolitical front, rising tensions in the Middle East may also garner some attention.

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