Mortgage Rates & the State of Emergency

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Financial markets are impacted by global events such as the Coronavirus. Mortgage rates are among the financial products feeling the Pandemic’s impact. March 13, 2020 the State of Emergency declaration also effected mortgage rates.

State of Emergency – What is It?

Before contemplating it’s impact, understanding a State of Emergency is crucial. At its most basic level a State of Emergency opens doors and empowers the government to act on a grander stage in a more unfettered manner. However, it does not mean that everyone’s life is in immediate danger.

Declaring a State of Emergency allows the government to act in unique ways to solve an exceptional problem – including allowing the dumping of infectious medical waste in the ocean – I’m not making this up!

Learn more about what a President can and cannot do under an SOE

Depending on which law resource you read, a State of Emergency gives the President powers vested in 100 to 125 laws. These laws state “in the case of a National Emergency the President can do x”.

How Mortgage Rates React to the SOE

Today marked the 60th State of Emergency declared by a sitting President in United States history. As you may know, financial markets tend to react to this kind of thing and today was no exception.

To set the foundation it’s important to know how mortgages rates work. In short, mortgage rates fluctuate with the action and reaction of an open financial market. In fact, movement in mortgage rates often rivals the temperamental stock market. In fact, the stock and mortgage backed security (bond) market are interrelated. Furthermore, just as fear and uncertainty move stocks, they can also drive mortgage rates while driving consumers crazy.

Considering the above, this weeks interest rate volatility seems logical based on the Cornovirus footprint expanding. For example, mortgage rates hit historical lows Monday March 9, 2020. As the NBA suspended it’s season and Disneyland closed the next 4 days erased new lows and pushed mortgage rates back up. Important reality check – Mortgage rates remain at very attractive/low levels.

In short, as virus news spread the markets shook with uncertainty. It stands to reason that uncertainty‘s polar opposite – certainty – will pave a return path to normalcy.

Will Mortgage Rates Fall Again?

Will we return to the ultra mega low rates of this past Monday? Maybe – but that’s as tough a question to answer today as on any non-coronavirus toned day of the year. Actually, it’s even tougher to answer right now. I advise that anyone even lightly flirting with refinancing or buying a home to apply and get into position to lock your rate. As the past 2 weeks have proven, rates can rise and fall and only those who are positioned properly can strike while the iron’s hot.

Ultimately, when markets jet in one direction “too” quickly they tend to rebound. Fear typically creates rapid movement. Fear also typically subsides at some point. That subsidence is when markets regain footing. In other words, I expect interest rates to come back down.

However, it’s critical to know what “rates coming back down” really means. It means rate should settle down from their current higher levels. Current levels are higher than 5 days ago. Do rates come back to Monday 03/09/20 levels and then dive deeper than that? Time will tell. First rates need to come back down to last weeks levels.

How Would a Fed Emergency Cut Play Out?

While a Fed Rate cut is never a direct line to lower mortgage rates, many are taking solace in the whispers of another emergency Fed Cut next week. While the talk and execution of another cut will sound and feel safe, ultimately the solution lies elsewhere.

After-all, the fear and uncertainty behind mortgage rates going up and stocks falling is different this time. Its our concern over our family’s health, what schools and businesses will shut down and who has to stay home without a paycheck due to a work closure or their child’s school closure.

All of these concerns logically tie to the stock sell off this week. None of them are cured by a Fed Funds Rate reduction. An emergency Fed Cut feels optical. It supports the administrative direction. Not a horrible thing. Just not a pound for pound influence on mortgage rates.

Reversing Course After a Rough Week

The things I believe renew market strength and confidence and that circle us closer to Monday’s ultra low mortgage rates are:

  • A firm determination of the viruses Scope in the US (better testing will help with this)
  • Plan to limit the spread of the virus (limiting large events etc.. will help with this)
  • Streamlined health care treatment plans (freeing up resources will help with this)
  • Financial backstopping for those impacted (deferring student loan interest – in part – helps with this)

In fact, look at stocks and mortgage rates after the Presidential address. You’ll see both improved into the bell. In fact, the stock market just had it’s best day since 2008. This is a microcosm of what will slide the rate scale back toward pre-March 10, 2020 levels.

Lastly, the market observing a swift and measurable plan of attack on the virus would go a long toward picking up the pieces of a financial week that resembled a Jenga stack after a bad play. For now stay tuned!

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