May Mortgage Outlook: Rates Stable but Braced for Shocks

Mortgage rates are likely to remain relatively stable in May. There’s no doubt that we’ll have daily ups-and-downs, but a major dive is unlikely to happen. (My apologies to anyone hoping 5% rates would be back on the table anytime soon.)

On the plus side, we’re unlikely to see a spike unless there are major negative developments in Iran. While the ceasefire has kept a lid on that conflict for a while, renewed aggression could alarm markets and push up mortgage rates. Unfortunately, we can’t count out that possibility.

It’s easy to grasp why those actions would affect gas prices, but mortgage rates might be a bit more puzzling. Here’s how we get from A to B (or really, in this case, A to F — there’s more than one step).

Mortgage rates are always a little higher than bond yields to reflect that MBS are slightly riskier than bonds. While bonds last for a fixed duration and can guarantee a fixed payout, with mortgages there’s always the possibility the loan ends early due to a sale or refinance.

Again, we did see rates improve in April, as the markets became desensitized to headlines coming out of the Middle East. But big news can still have an impact. If we see mortgage rates make a major move in May, it’ll likely be because of a development in the Iran war.

On the home front, despite anticipation that a new Federal Reserve chair might mean upcoming rate cuts, we’re unlikely to get downward pressure on mortgage interest rates immediately.

The decision had four dissents. That may not sound dramatic, but this is the Fed we’re talking about — the last time four members dissented was 34 years ago. Stephen Miran’s dissent was no surprise, as he has voted for a larger rate cut at every meeting he has been part of. The other three dissents, however, were eyebrow-raising.

The dissenting governors objected to the word “additional” in the sentence “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.” It may not sound even slightly controversial, but the argument is that “additional” implies “additional cuts,” since the last three changes to the funds rate were cuts.

On top of that, during his post-meeting press conference, current chair Powell made clear that he will remain as a governor once his term as chair concludes. Governors usually step down after their terms as chair end, but Powell explained that he wants to stay on while legal proceedings against the Fed remain unresolved. Powell sticking around also has the effect, however, of barring President Trump from appointing a replacement Fed governor.

Kevin Warsh is expected to be confirmed as the next Fed chair later this month. Warsh repeatedly affirmed in confirmation hearings that he would not bow to the president’s wishes — President Trump has made it extremely clear since returning to office that he wants to see the Federal Reserve lower interest rates. But Warsh has also been making his own case for lower rates, claiming that an AI-driven productivity boom will reduce inflation.

TL;DR: With at least three Federal Reserve governors voicing concerns about inflation, not to mention Powell still in the mix, Warsh could face considerable opposition to rate cuts. If the Fed is not in a cutting mood, that’s one less reason for mortgage interest rates to fall.

In April, Fannie Mae’s economic team raised their 30-year mortgage rate expectations after lowering their predictions in March. The Fannie Mae forecast now more closely aligns with the Mortgage Bankers Association, whose forecast was unchanged this month.

I speculated in my previous column that the difference between the March forecasts was likely because of when they were created, with MBA making its predictions later in the month — and further into the Iran war — than Fannie Mae.

Now both long-term views show extremely modest decreases as the year rolls on; really, these are predictions of rate stability.

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