Mortgage rates this week shattered a new record, falling to 2.81%—the lowest rate on the books, according to Freddie Mac’s Primary Market Survey.
We haven’t seen rates north of 3% on 30-year fixed mortgages since July 30, and they seem to have no bottom. As the economy continues to look shaky amid stalled stimulus talks, rising unemployment claims and lack of an approved coronavirus vaccine, many wonder how this will impact mortgage rates in the near-term and into 2021.
Rates Likely to Stay Low Until the Pandemic Ends
Most experts predict that rates will stay low into 2021, mainly due to the effects of the coronavirus on the economy. Without an approved vaccine, the fallout from Covid-19 will likely continue.
“Under our baseline scenario, we expect economic activity to pick up in the later half of 2021 after a vaccine or effective therapeutic is made available,” says Cris deRitis, deputy chief economist at Moody’s Analytics.
If consumer spending and business investment pick up speed, then it could ignite economic growth and employment, and eventually, hoist rates. Although these upside risks (that could drive mortgage rates higher) exist, deRitis says that most of the risks are weighted toward the downside.
Most notable is the effect of rising coronavirus infections on consumer and business confidence as well as the lack of economic aid for people who have lost jobs and income because of the pandemic.
“Delays in providing additional fiscal support to struggling households and businesses could lead to a wave of job losses and business closures, extending the economic recovery and putting downward pressure on mortgage rates,” deRitis says.
A Double-dip Recession Could Drive Rates Down to the 1% Range
Mortgage rates could plunge even lower if the economy spirals again, putting us in a double-dip recession, says Ralph B. McLaughlin, chief economist and senior vice president of analytics at Haus, a home-financing startup.
A double-dip recession happens when an economy contracts, recovers and then contracts again. This is also known as a W-shaped recovery.
Major employers across industries are shedding workers, which portends deeper cuts to the economy. Companies have been laying off thousands of employees in recent weeks, as states struggle with balancing public safety and the economy while the government has yet to come up with an economic stimulus package.
Disney recently terminated 28,000 employees, movie theater giant Cineworld, which owns Regal Cinemas, laid off 40,000 U.S. workers, Raytheon let go of 15,000 workers (as the demand for jet engines wanes), and the list goes on. There were 898,000 unemployment claims in the week ending Oct. 10, up 53,000 from the week before.
“We’re still forecasting a small, but noticeable, chance of a double-dip recession if the virus comes back and we don’t have a vaccine,” McLaughlin says. “If that’s the case, we might not see a full recovery until 2022 and re-hiring of furloughed workers would be slowed considerably.”
If the worst happens and the economy tanks, mortgage rates could fall to a low of 1.875%, says Logan Mohtashami, housing data analyst at HousingWire, a real estate news website for housing professionals. But that’s unlikely he says. The economy has rebounded and fear of the virus has faded, unlike what we saw in March and April.
“So those levels won’t happen unless we see a real double-dip recession. As long as the 10-year yield is above 0.62%, the bond market is saying the economy is getting better,” Mohtashami says.
How the Election Could Impact Rates
There is a threat rates could rise once the uncertainty of the election is over, McLaughlin says. Right now, politics are playing tug-of-war with a second relief package, which could put a strain on consumer spending and push up the number of evictions. There are about 21% of renters who are at risk of being evicted, according to a study by the Aspen Institute.
If the country gets disaster relief, which could come down to who’s in power, look for rates to rise, Mohtashami says.
If Democrats control the Senate and Joe Biden wins the presidency, disaster relief will go through, which will be bullish for the economy. This means yields on the 10-year Treasury will lift, which will also boost mortgage rates. The same scenario is likely to happen if President Trump is reelected and the GOP wins the Senate. However, if different parties control the White House and the Senate, we could see a drawn-out battle over a relief package, which will keep rates down.
“Senate Republicans don’t want to give Biden any disaster relief, hence the stalling on disaster relief for months,” Mohtashami says. “If Biden wins and Republicans hold the Senate, it gets tricky because Republicans will fight tooth and nail not to provide adequate disaster relief if Biden wins.”
Other Factors that Could Impact Rates
There are two other plausible scenarios that could drive up rates, says Todd Teta, chief product and technology officer at ATTOM Data Solutions.
If the Federal Reserve stops purchasing mortgage-backed securities (MBS) at current levels—about $100 billion per month—rates would begin rising again. The Fed has yet to commit to MBS spending going into 2021, which signals that it might tighten its spending.
“We assume that the Fed will start decreasing these purchases next year,” Teta says, citing the Fed’s lack of purchase commitment beyond 2020.
The other upward influence on rates is the end to conservatorship of the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. The GSEs were put into conservatorship under the Federal Housing Finance Agency (FHFA) following the breakdown of the housing market in 2008. The goal was to rehabilitate the housing market and, at some point, the GSEs would exit conservatorship and become private entities again.
An aspect of this exit from conservatorship is a proposed rule defining the capital framework of the GSEs, which among other things requires that the GSEs hold bank-like capital levels. This new framework will likely decimate the GSEs market share and drive up rates.
In a paper criticizing the FHFA’s proposed rule, the Urban Institute states: “The FHFA’s attempt to shoehorn the GSEs into a bank-like capital regime would exact a heavy cost on the mortgage market. It would drive up mortgage rates, increase the incentive the GSEs have to take on credit risk, and decrease their incentive to off-load that risk. In effect, it would take us to a more expensive, excessively capitalized version of the housing finance system we had prior to the financial crisis.”
President Trump began the GSE exit process in September 2019, too late to see it through prior to the election, which means the future of the GSEs is still uncertain. If Biden wins, this exit could drag on for years.
For now, most experts forecast that mortgage rates won’t shoot up anytime soon. For consumers, this is good news. A continuation of low rates can help more than 19 million homeowners switch to a lower rate and save money, which is a bright light in today’s economy.
Read the complete article online at https://www.forbes.com/sites/advisor/2020/10/16/how-much-further-could-record-low-mortgage-rates-fall/#58b95f783c32