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Demand for purchase mortgages hit the lowest level in nearly three decades last week, but relief in the form of lower mortgage rates could be in sight after Federal Reserve policymakers elected not to hike short-term rates Wednesday.

The Federal Reserve had been expected to hold off on further rate hikes this month, but bond yields and mortgage rates eased after Fed Chair Jerome Powell sounded less hawkish on inflation in briefing reporters on the central bank’s outlook.

After approving 10 increases in the short-term federal funds rate between March 2022 and May 2023 totaling 5 percentage points, the Fed has implemented just one, 25-basis point increase in the second half of this year, bringing the federal funds rate to a target range of 5.25 to 5.5 percent.

“I think for much of the last year and a half the concern was not getting rates high enough in time to avoid having higher inflation expectations become entrenched,” Powell said. Now, “The risk of doing too much versus the risk of doing too little is getting closer to balance, because policy is clearly restrictive at five and a quarter to five and a half percent.”

Yields on 10-year Treasury notes, which often indicate where mortgage rates are headed next, fell sharply Wednesday after Powell’s speech. At 4.78 percent Wednesday afternoon, yields on the 10-year were down more than 20 basis points from a 16-year high of nearly 5 percent registered last week and continued to fall Thursday.

The Mortgage News Daily rate index showed rates for 30-year fixed-rate mortgages fell 19 basis points Wednesday, to 7.69 percent, and dropped to 7.51 percent Thursday. According to that survey-based index, mortgage rates surged past 8 percent on Oct. 19 but have now retreated to levels seen at the beginning of the month.

In voting to leave rates where they are for now, Fed policymakers noted that “Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.”

That acknowledgement “opens the door for the Fed to skip the final rate hike this year implied by the September dotplot,” Pantheon Macroeconomics Chief Economist Ian Shepherdson said, referring to the Summary of Economic Projections released in September, showing most Fed policymakers anticipated one more 25-basis point increase in the federal funds rate would be required by the end of the year.

The CME FedWatch Tool, which tracks futures markets to predict the Fed’s next moves, on Wednesday put the odds of a rate hike when the Fed meets next on Dec. 13 at just 20 percent, down from 29 percent on Tuesday.

Ian Shepherdson

“In short, no decision on December has yet been taken, so the next two rounds of employment, CPI, and other data will be key,” Shepherdson said in a note to clients. “We think the Fed is done, but Chair Powell will emphasize in the press conference that progress on inflation is not yet sufficient for the Fed to be sure they won’t hike again.”

That’s exactly what Powell did, telling reporters that labor demand still exceeds the supply of available workers, and inflation remains “well above” the Fed’s longer-run goal of 2 percent.

“Inflation has moderated since the middle of last year and readings over the summer were quite favorable,” Powell said. “But a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal. The process of getting inflation sustainably down to 2 percent has a long way to go.”

Even once it’s clear the central bank is done hiking rates, the question will be how long it will pursue a “higher for longer” strategy favored by some Fed policymakers.

Michael Fratantoni

“Even though third-quarter economic growth came in quite strong, and several job market indicators continue to show strength, so long as inflation continues to come down, the Fed is likely to pause at this level for some time,” Mike Fratantoni, the chief economist at the Mortgage Bankers Association (MBA) said in a statement. “We expect its next move will be a cut in next year’s second quarter.”

The MBA’s latest Weekly Mortgage Applications Survey, released a few hours before Wednesday’s Fed meeting wrapped up, showed demand for purchase mortgage slipped last week to the lowest level since 1995.

Applications for purchase loans fell by a seasonally adjusted 1 percent last week compared to the week before, and were down 22 percent from a year ago. Requests to refinance were down 4 percent week over week, and 12 percent from a year ago.

“The housing and mortgage markets are at a standstill,” Frantoni said. “Mortgage rates near 8 percent, coupled with a lack of inventory, are impairing affordability, even as new home construction picks up speed. If the Fed does indeed move to cut rates next year and signals its intent to do so, mortgage rates should trend downward. Our forecast calls for this to happen, which would support a somewhat stronger spring housing market.”

Mortgage rates retreat

Rates on 30-year fixed-rate conforming mortgages averaged 7.69 percent Wednesday, according to daily rate lock data tracked by the Optimal Blue Mortgage Market Indices.

That’s down from a 2023 peak of 7.83 percent registered Oct. 25 — the highest rate Optimal Blue has recorded for conforming loans in records going back to 2017.

Freddie Mac records dating to 1970 show mortgage rates last week hit levels not seen since November 2000.

Mortgage rate expected to ease

Source: Fannie Mae, Mortgage Bankers Association forecasts.

In an Oct. 15 forecast, MBA economists projected mortgage rates will slip below 7 percent in the first quarter of 2024, and continue a steady decline to an average of 6.1 percent percent during Q4 2025.

Fannie Mae forecasters have a more cautious view of how far and how fast mortgage rates might fall, predicting in an Oct. 10 forecast that rates on 30-year fixed-rate mortgages won’t dip below 7 percent until the third quarter of 2024.

Get Inman’s Mortgage Brief Newsletter delivered right to your inbox. A weekly roundup of all the biggest news in the world of mortgages and closings delivered every Wednesday. Click here to subscribe.

Email Matt Carter

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