May Mortgage Outlook: Expect Volatility
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Mortgage rates might pogo up and down in May. By the end of the month, they could rise due to tariff-related inflation or fall in response to a tariff-induced economic slowdown.
Keep in mind that we're in exceptionally unpredictable times. Mortgage rates will probably be volatile in May, "because of growing uncertainty in the economy. It is getting harder to predict which way mortgage rates will ultimately head," said Lisa Sturtevant, chief economist for Bright MLS, a database of homes for sale.
How home buyers can manage unpredictability
I hope to list my house in May (if I can fix it up in time). If I were the buyer, I would act as if rates could take a turn for the worse at any moment. That means I advise buyers to lock their mortgage rate as soon as it's practical.
When you lock the mortgage rate, you secure a guarantee from the lender that it will charge you the agreed-upon interest rate if you close the transaction by a certain date. In less volatile times, a lot of borrowers "float the rate" — that is, they don't immediately lock. They hope for rates to fall, and if rates oblige, that's when they lock.
But what if you float and rates go nowhere but up? It means that you'll pay a higher interest rate (and monthly payment) than you would have if you had locked at the outset.
Whether you lock or float, you take a risk. But the risk of floating may be greater than the risk of locking in May because the up-and-down rate movements could be larger and faster than usual.
Where the unpredictability comes from
In May, consumers might begin to see results of higher tariffs charged on Chinese goods. A spokesman for Hapag-Lloyd, a prominent shipping company, told the Wall Street Journal that freight shipping bookings had dropped by about one-third in a period of unprecedented unpredictability.
American retailers and manufacturers are scrambling to source goods from countries besides China. But in the short term, consumers could confront shortages and higher prices. Inflation, in turn, could eventually push mortgage rates higher.
Meanwhile, dock workers, truckers and factory workers might have less to do as fewer Chinese shipments arrive. That could contribute to a possible economic slowdown. In that case, a sluggish or shrinking economy could push mortgage rates lower.
Uncertainty's effect on home sales
No one knows for sure what will happen to the economy or when. If there's one thing we can feel confident about, it's that the Federal Reserve almost surely will leave short-term rates alone at its May 7 meeting. According to CME FedWatch, traders give more than a 90% chance that the federal funds rate will remain unchanged through the meeting.
Home buyers will feel the consequences. Anxiety about the economy, tangled with rising costs, could result in fewer home sales, said Kara Ng, senior economist for Zillow Home Loans, in a statement. It could lead buyers "to adopt a 'wait and see' approach regarding significant purchases like homes," she said.
Even the most determined buyers could struggle with affordability if mortgage rates go up. Lawrence Yun, chief economist for the National Association of Realtors, noted that inventories of unsold homes are growing. "I thought that more inventory would lead to more sales. But that's not the case," he said. He blames higher mortgage rates for restricting home sales.
What other forecasters predict
Two organizations — loan securitizer Fannie Mae and the Mortgage Bankers Association — update their rate forecasts every month. They usually agree about the direction of mortgage rates, but not this time. They have remarkably different predictions for May and June.
Fannie Mae expects rates to drop over the next two months, while the MBA predicts that rates will rise. Both foresee substantial moves.
Both organizations base their forecasts on Freddie Mac's weekly rate survey. According to Freddie, the 30-year rate averaged 6.73% in April. Fannie expects the rate to average 6.5% from April through June. To get that low, rates would have to fall a lot in the next two months. That would make my "lock your rate ASAP" advice look dumb.
On the other hand, the MBA predicts that the 30-year mortgage will average 7% in the second quarter, which implies a big rise in May and June. If that forecast turns out to be accurate, my rate-lock advice will make me look like a psychic.
Both organizations think rates will slowly and steadily fall in the nine months beginning in July. Whether they're right or wrong, the best time to buy a home is when it's an appropriate stage of your life. Don't time your purchase decision on when you think rates or prices will bottom out, because you'll probably get it wrong.
What I predicted for April and what happened
At the end of March, I predicted that mortgage rates "might rise modestly in April as businesses and consumers brace for higher tariffs on imports." That was correct, as the average rate on the 30-year mortgage rose from 6.65% in March to 6.73% in April in Freddie Mac's weekly survey.