Experts eye mid-6% rates, potential housing market boost in coming months
Mortgage rates have fallen to their lowest point since early February, Freddie Mac said.
The 30-year fixed-rate mortgage (FRM) averaged 6.73% as of August 1, down from 6.78% last week and 6.90% a year ago. The 15-year FRM also decreased, averaging 5.99%, compared to 6.07% last week and 6.25% a year ago.
Freddie Mac chief economist Sam Khater attributed the decline to expectations of a Federal Reserve rate cut and signs of cooling inflation.
“Expectations of a Fed rate cut, coupled with signs of cooling inflation, bode well for the market - but apprehension in consumer confidence may prevent an immediate uptick as affordability challenges remain top of mind,” Khater said in Freddie Mac’s latest Primary Mortgage Market Survey. “Despite this, a recent moderation in home price growth and increases in housing inventory are a welcome sign for potential homebuyers.”
Federal Reserve officials have decided to maintain the benchmark interest rate in July. While rates remain in the 5.25% to 5.5% range for now, the Fed’s message suggests potential cuts in the coming months.
Kevin Ryan, chief financial officer of Better.com, commented on the implications of the possible Fed rate cut for the mortgage and housing markets.
“With the Fed’s optimistic outlook towards a potential September cut, there’s already been a noticeable rally in the mortgage market,” Ryan said. “For the first time in over four years, the bias for mortgage rates is downward, which could bring some marginal activity into the market. Although affordability challenges will remain, the trend towards lower rates is a positive development for potential homebuyers.”
Ryan predicted that mortgage rates could improve slightly in Q3 and Q4, potentially reaching the mid-sixes.
“This represents a 50-basis point improvement, which could stimulate some increased activity in the housing market,” he said.
Melissa Cohn, regional vice president at William Raveis Mortgage, pointed out the risk of a recession if the Fed cuts rates too aggressively.
“We’re still at a very high level. Mortgage rates bottomed at 3%. I don’t believe that we’re ever going to get back to 3%,” Cohn said. “The rates are going to come down an eighth of a point at a time, the same way that the Fed is only going to cut rates a quarter point at a time, probably. So, it’s a little bit of a slow drip.”
Cohn also noted that mortgage rates are more closely tied to the bond market and inflation rates than to the Federal funds rate.
“People also need to remember that [...] mortgage rates aren’t going to change based on a Fed cut. Your home equity rate will drop,” she said. “Your student loans, car loans, all those rates will drop every time the Fed cuts rates, but mortgage rates are tied to the bond market, and the bond market is more affiliated with the rate of inflation and bad economic data than it is to the Fed funds rate.
“The tone of the market has changed, and the doves are ready to fly out of the cage.”
Read next: Will rate cuts be enough to ignite the US housing market?
The declining rates have already impacted the refinance market. According to ICE August Mortgage Monitor data, the number of highly qualified refinance candidates increased by 22% following the latest Fed remarks.
If 30-year rates were to dip below 6.625%, it could add another 18% to the number of refinance candidates, resulting in a total rise of more than 40% from earlier in the week.
“The number of refinance candidates entering this week was already at a nearly two year high, driven by easing bond yields and mortgage rates in recent weeks, with twice as many borrowers in the money for a refinance and three times as many highly qualified refinance candidates as there were at this same time last year, when rates were at a similar level to where they are today,” said Andy Walden, vice president of research and analytics at ICE.
Despite these positive trends, the refinance market remains modest by historical standards, with approximately 655,000 highly qualified refinance candidates currently in the market. Nonetheless, this uptick is viewed as a welcome development for what has been a sluggish refinance market in recent quarters.
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