Bond market investors convinced Fed won’t hike rates next week

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Demand for purchase loans picked up slightly last week and mortgage rates continue to remain below 2023 peaks, as bond market investors remain convinced that new inflation data out Wednesday won’t prompt the Federal Reserve to hike rates next week.

A weekly survey of lenders by the Mortgage Bankers Association (MBA) showed applications for purchase mortgages were up by a seasonally adjusted 1 percent last week compared to the week before, but down 27 percent from a year ago. Requests to refinance were down 5 percent week over week and 31 percent from a year ago.

The drop in refi demand depressed overall loan application volume down to the lowest level since 1996, MBA Deputy Chief Economist Joel Kan said in a statement.

The increase in purchase loan demand — only the second bump in the last nine weeks — was driven by a 2 percent gain in applications for conventional loans eligible for purchase by Fannie Mae and Freddie Mac.

“Given how high rates are right now, there continues to be minimal refinance activity and a reduced incentive for homeowners to sell and buy a new home at a higher rate,” Kan said. The “lock-in effect” created by rising rates has helped make listings scarce, adding to affordability woes.

A separate MBA report that gauges mortgage credit availability showed lenders loosened up slightly in August, but that access to mortgages remains close to “very low levels last seen in January 2013,” Kan said.

“Industry capacity continues to decline as lenders reduce staffing and simplify their product offerings to reduce costs and raise profitability,” Kan said in a statement. “While this dynamic has led to lower credit availability, it has also provided some lenders with new opportunities to expand some of their product offerings, and we saw some of that growth in the jumbo space last month.”

Mortgage rates level off

The Optimal Blue Mortgage Market Indices, which track daily rate lock data, show that after hitting a 2023 high of 7.30 percent on Aug. 22, rates on 30-year fixed-rate conforming mortgages have plateaued, as have FHA-backed loans. Loans backed by the FHA, Fannie and Freddie are sold to bond market investors who are the ultimate source of funding for most U.S. home purchases.

But rates on jumbo mortgages exceeding Fannie and Freddie’s $726,200 conforming loan limit have continued to be volatile, hitting a new 2023-high 7.67 percent on Sept. 7. Mortgage lenders often hold jumbo loans in their own investment portfolios, exposing them to the risk that borrowers will default or refinance their loans if rates go down.

Yields on 10-year Treasurys, a barometer for mortgage rates, spiked briefly Wednesday but then retreated as investors digested the latest Consumer Price Index release from the U.S. Bureau of Labor Statistics.

While the CPI report showed year-over-year headline inflation rose from 3.2 percent in July to 3.7 percent in August, much of the increase was driven by a rebound in gasoline prices. Annual core inflation, which excludes volatile gasoline and energy prices, fell from 4.7 percent in July to 4.3 percent in August.

Fed policymakers, who haven’t raised rates since July, are scheduled to conclude their next two-day meeting on Sept. 20. The central bank has implemented 11 rate increases since March 2022, bringing the short-term federal funds rate to a target of 5.25 to 5.5 percent — the highest level since 2001.

Since it takes some time for those rate increases to have an impact on the economy, the Fed is widely expected to stay put until at least November, when it will have more inflation data to analyze.

A month-over-month increase in core inflation driven by rising rents, vehicle insurance and airline fares was a “modest disappointment,” Pantheon Macroeconomics Chief Economist Ian Shepherdson said in a note to clients Wednesday, but “the month-to-month numbers will inevitably hop around.”

“Today’s [month-over-month] core number raises the odds of a rate hike next week, but not by much,” Shepherdson said. “We expect the Fed to remain on hold, but to signal willingness to hike again depending on the data. Our take on the data over the period before the November meeting suggests the Fed won’t hike then, either. We think the chance of another hike is about 25 percent.”

Futures markets see 42% chance of November rate hike

Wednesday afternoon trading on futures markets tracked by the CME FedWatch Tool put the probability of a September Fed rate hike at just 3 percent, down from 8 percent on Tuesday. But futures markets predict a 42 percent chance that Fed policymakers will hike rates again when they meet Nov. 1.

For the week ending Sept. 8, the MBA reported average rates for the following types of loans:

• For 30-year fixed-rate conforming mortgages (loan balances of $726,200 or less), rates averaged 7.27 percent, up from 7.21 percent the week before. With points increasing to 0.72 from 0.69 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans, the effective rate also increased.
• Rates for 30-year fixed-rate jumbo mortgages (loan balances greater than $726,200) averaged 7.25 percent, up from 7.21 percent the week before. Although points decreased to 0.72 from 0.76 (including the origination fee) for 80 percent LTV loans, the effective rate also increased.
• For 30-year fixed-rate FHA mortgages, rates averaged 7.04 percent, up from 7.03 percent the week before. With points increasing to 0.98 from 0.95 (including the origination fee) for 80 percent LTV loans, the effective rate also increased.
• Rates for 15-year fixed-rate mortgages popular with homeowners who are refinancing averaged 6.72 percent, up from 6.66 percent the week before. With points increasing to 1.01 from 0.86 (including the origination fee) for 80 percent LTV loans, the effective rate also increased.
• For 5/1 adjustable-rate mortgages (ARMs), rates averaged 6.59 percent, up from 6.33 percent the week before. With points increasing to 1.16 from 1.11 (including the origination fee) for 80 percent LTV loans, the effective rate also increased.

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Email Matt Carter