Refinances and purchase applications are on the rise
A pronounced recent dip in interest rates has spurred a sudden uptick in mortgage market activity across the US, with refinances and applications both jumping thanks to lower borrowing costs.
With the contract rate for a 30-year fixed mortgage sliding to 6.54% two weeks back, borrowers have been refinancing at their highest level for over two years, according to the Mortgage Bankers Association (MBA), while the week ending August 9 saw purchase applications increase by 2.8%.
Rates are projected to tick even lower in the coming weeks amid continuing economic uncertainty – but is there a “magic number” that could convince existing homeowners that now is the time to abandon their current low mortgage rate and recommence their purchasing plans?
The fact that scores of borrowers bought or refinanced their homes during the record-low-rate environment of the COVID-19 pandemic means many have been reluctant to consider a move because it would mean having to take out a much more expensive mortgage than their current arrangement.
But even though rates almost certainly won’t return to the historic lows of the pandemic era, a steady further drop could prove sufficient to persuade homeowners to step back into the market and list their own homes, according to a Pennsylvania-based mortgage broker.
Paul Carson (pictured top), of Philadelphia Mortgage Brokers, told Mortgage Professional America in July that even when rates were hovering around the 7% mark, activity had remained robust – but a continued drop would probably signal even stronger movement among buyers and owners. “I think personally the magic number [would be] if we could see 5.5% to 6%,” he said.
“Everybody can [say], ‘Alright, I can live with a five if I have to say goodbye to a two or three or four. I can deal with a five,’ but six, seven and eight really hurt – especially for well-qualified primary residence people when we really hit the peak of about 8% for those folks.”
Bank of America has updated its economic forecast, signaling a reduced likelihood of a US recession. CEO Brian Moynihan attributes this shift to steady consumer spending, which, although moderated, remains resilient.
— Mortgage Professional America Magazine (@MPAMagazineUS) August 13, 2024
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Homeowners likely to feel better about making a move
The rapid rise in interest rates in 2022 and 2023 helped pour cold water over a previously red-hot US housing market and forced many prospective buyers to the sidelines, their budgets squeezed by mounting affordability challenges and higher borrowing costs.
Softer-than-expected jobs data and a rapidly slowing US economy have helped propel the latest downward slide in rates, and although they almost certainly won’t return to the ultra-low environment that emerged through COVID, Carson underscored the important psychological boost falling rates can provide.
Rates in the sixes, after all, are preferable to those in the sevens. “It’s a minor psychological thing but it matters,” he said. “As much as we don’t want to be emotional about numbers and interest rates, a lot of people still get that way about it.
“So it’s good to recognize how people feel about the finances and the mortgage and try to work with them and help them still achieve their goals and not overextend or shoot themselves in the foot or bite off more than they can chew.”
How have the latest inflation figures impacted the rate outlook?
Mortgage rates have fallen amid growing market certainty about a Federal Reserve rate cut in September, which would mark its first move to bring the federal funds rate lower since the beginning of the pandemic.
A drop in overall inflation in July, announced yesterday, appeared to copper-fasten a Fed cut at its next meeting, which will take place on September 17-18. The so-called core consumer price index (CPI) slipped for a fourth successive month, coming in at 3.2%, while the overall CPI increased by 2.9% on a year-over-year basis.
With further jobs and inflation reports due to arrive before the Fed’s next decision, the central bank will have further data to assess while weighing up what move to make – with markets currently divided on whether that will be a 25- or 50-basis-point rate cut.
In the meantime, it seems clear that the days of rapidly rising mortgage rates, and uncertainty about how high rates may go, are over for now.
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