Mortgage outlook: Rates to tread water in July

Frank Franklin II/AP

Automobiles pass a JP Morgan Chase building Thursday, May 10, 2012, in New York. JPMorgan Chase, the largest bank in the United States, said Thursday that it lost $2 billion in the past six weeks in a trading portfolio designed to hedge against risks the company takes with its own money. The company's stock plunged almost 7 percent in after-hours trading after the loss was announced. Other bank stocks, including Citigroup and Bank of America, suffered heavy losses as well. (AP Photo/Frank Franklin II)

By: Holden Lewis, Nerd Wallet

The interest rate on the 30-year fixed-rate mortgage remained near record lows in June and is likely to stay there in July.

The 30-year fixed averaged 3.33% APR in the first four weeks of June, a smidgen lower than the 3.37% average APR in May and 3.36% in April. June’s rate average was the lowest in the four-year history of NerdWallet’s daily rate survey.

A mission to reduce rates

Mortgage rates were remarkably anchored from April through June after the Federal Reserve intervened to stabilize rates and push them down.

But the Fed’s intervention hasn’t been entirely successful: Although mortgage rates have been remarkably stable, they’re stuck at a higher-than-expected level. To put it more bluntly, rates should be lower.

Since March, the central bank has bought billions of dollars’ worth of Treasurys and mortgage bonds “to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions,” as the Fed explained in a June 10 statement.

Dissecting that short passage:

The Fed is saying that its goal is to push interest rates, including mortgage rates, lower. That’s what “transmission of monetary policy to broader financial conditions” means.
It’s trying to accomplish that goal by buying Treasurys and mortgage bonds to calm and stabilize those markets. Stabilizing markets is a method, not the goal.

» MORE: How mortgage rates are determined

Fed failed to make a bigger splash

The Fed has succeeded in calming the waters. That’s why there were ripples, not waves, in fixed mortgage rates from April through June. But it has only partially succeeded in its goal to push interest rates lower. For the Fed to declare victory in “fostering effective transmission of monetary policy to broader financial conditions,” mortgage rates would have to fall another half a percentage point or so.

With its intervention, the Fed decreased Treasury yields and mortgage rates. But the results are unequal: Since January, the 10-year Treasury yield has fallen a little over one percentage point, while the 30-year mortgage has fallen about half a percentage point. Normally, the two would fall roughly the same amount.

Rates slow to sync with Treasurys

Why haven’t mortgage rates fallen further? You might guess that lenders are keeping rates elevated to offset the risk of mortgages going into default during the COVID-19 recession. But mortgage rates tend to fall during recessions.

» MORE: What COVID-19 means for mortgage rates

Maybe mortgage servicers, the companies that collect monthly payments and work with past-due borrowers, want to be paid for the increased risk they bear, and it’s translating to higher rates. Maybe an undetected economic force keeps a floor on mortgage rates, preventing the 30-year fixed from falling below 3% and lingering there.

A more plausible theory is that mortgage rates will follow historical patterns and shamble lower until they’ve fallen roughly the same as Treasury yields. That’s the conclusion that Bill Emmons, economist for the Federal Reserve Bank of St. Louis, makes in a paper titled “Why Haven’t Mortgage Rates Fallen Further?”

Using history as a guide, Emmons writes, “we would expect a further decline in mortgage rates of perhaps 0.5 percentage points.” If he’s right, mortgage rates might drop in July.

Don’t count on it, though. Not after these two months of stability; rates might continue to tread water.