May mortgage rates forecast

I predict that the rate on the 30-year mortgage won't change much in May. It will go up and down a bit day to day but will remain between 2.875% and 3.25%.

Companies will continue to hire, and consumers will keep spending, supported by relief checks from the American Rescue Plan. The burgeoning economy will establish a floor under mortgage interest rates, keeping them from dropping much. But economic growth won't lift rates much, either.

How April rates flipped the script

In April, I predicted that mortgage rates would meander up and down but end up slightly higher at the end of the month than at the beginning. My forecast was mostly wrong.

• The average rate on the 30-year fixed mortgage was 2.97% in April, down 16 basis points from March's average of 3.13%.

• The 30-year mortgage rate fell during the first three weeks of April, then went up three basis points in the last week.

I expect mortgage rates to rise whenever the economy grows rapidly — and we've had strong economic growth all year. The economy grew at an annual pace of 6.4% in the first three months of 2021, and it kept improving in April. Unemployment claims fell three weeks in a row, to a pandemic-era low in the week ending April 24. Millions of Americans got vaccinated.

Nevertheless, fixed mortgage rates fell.

I'm mystified. Maybe lenders are holding rates down to compete for a smaller-than-expected pool of customers. Fewer homeowners are refinancing, maybe because they have already refinanced. Purchase mortgage applications went down in late April, too; I blame the shortage of homes for sale.

When are rates 'historically low'?

In articles about mortgages, the phrase "historically low rates" has been bandied about for many years. I've written the phrase hundreds of times, and other writers use it, too. The definition of "historically low" has evolved as rates repeatedly set record lows.

Freddie Mac began gathering weekly mortgage rate information on April 2, 1971. That week, the average rate on the 30-year mortgage was 7.33%. The rate trended higher for more than a decade, topping out at 18.63% in October 1981.

The 30-year fixed fell below 7% for the first time in the last week of August 1993. Two months later, it dipped to 6.74%. At the time, it was a historical low.

The 30-year fell below 6% for the first time in September 2002, and below 5.5% for the first time in May 2003. It dropped to 5.21% for two weeks in a row in June 2003. That summer brought an unprecedented refinancing boom as homeowners took advantage of historically low rates.

The 30-year fixed was above 6% for most of the housing boom, and it fell in 2008, during the recession that followed the popping of the bubble. It broke below the 5% barrier for the first time in January 2009, below 4.5% in August 2010, below 4% in October 2011, and below 3.5% for the first time in July 2012.

It wasn't until July 2020 that the 30-year mortgage fell below 3% for the first time. It has remained below 3.25% since then.

In the 50-year history of Freddie Mac's weekly survey, the 30-year fixed has been below 3.5% for 105 weeks, as of April 29, 2021. Two years and one week, or 4% of the survey's life. Somewhat arbitrarily, that's where I draw the line: A 30-year mortgage below 3.5% is a "historically low rate."

It's hard to believe that people were buying houses in October 1981, when the rate was 15 percentage points higher, isn't it? I remember that month well — I saw the Rolling Stones for the first time, in a wild thunderstorm in Dallas, that Halloween — and the world seemed normal. If anything was strange those days, it was the absurdly short cutoffs I wore — more embarrassing, in retrospect, than guessing April’s mortgage rates wrong.