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Mortgage rates registered their biggest one-day drop in nearly four years Tuesday following an encouraging inflation report that convinced bond market investors the Federal Reserve is done hiking rates and may reverse course in the spring.

Homebuyer demand for purchase mortgages picked up for the second week in a row last week — even before the latest drop in mortgage rates, according to a weekly survey of lenders by the Mortgage Bankers Association (MBA).

Demand for purchase mortgages was up by a seasonally adjusted 3 percent last week compared to the week before, but down 12 percent from a year ago, according to the MBA’s Weekly Mortgage Applications Survey. It was the second consecutive week that mortgage demand ticked up, as investors who fund most mortgages grow more convinced that inflation is cooling and the Fed is done hiking rates.

Mortgage rates fell by 20 basis points Tuesday after the Bureau of Labor Statistics reported that the all-items Consumer Price Index (CPI) fell to 3.2 percent in October, down from 3.7 percent in September.

The news “triggered a huge rally in both bonds and stocks,” as investors became convinced that the Federal Reserve is done hiking interest rates — and may have to start bringing them down to head off a recession, Pantheon Macroeconomics forecasters said in their Nov. 15 U.S. Economic Monitor bulletin.

Mortgage rates retreat from peaks

The rally in bonds also helped bring mortgage rates down, with rates on 30-year fixed-rate mortgages averaging 7.34 percent Tuesday, down half a percentage point from a 2023 peak of 7.83 percent on Oct. 25, according to daily rate lock data tracked by Optimal Blue.

It was the biggest single-day drop in the Optimal Blue index since Mar. 23, 2020, when panicked investors sought safety in long-term government bonds and mortgage-backed securities after the spread of the COVID-19 virus was declared a pandemic.

Although the Fed hasn’t hiked rates since July, policymakers at the central bank have been careful to give the impression that they are prepared to tighten further if data shows the economy remains overheated. Just last week, mortgage rates were inching back up after Fed Chair Jerome Powell warned that policymakers are committed to raising rates as high as needed to bring inflation down, and that “we are not confident that we have achieved such a stance.”

Core CPI minus rent at 2 percent

Source: Bureau of Labor Statistics via Pantheon Macroeconomics. 

The big news in the latest inflation numbers was that core CPI, which excludes volatile food and energy prices, is slowing, Pantheon forecasters said. Take rent out of the equation, and core CPI is already at the Fed’s 2 percent inflation target, they noted.

Ian Shepherdson

“In most economic cycles investors eventually reach a point where they stop believing the Fed,” Pantheon forecasters Ian Shepherdson and Kieran Clancy wrote. “That point appears to have been reached yesterday in the wake of the October CPI report, which triggered a huge rally in both bonds and stocks and took out most of the residual pricing of the chance of a final rate hike in December. We have been on this page since the July hike but the wait for the data to tell markets that the Fed is done has been long and, over the summer/early fall, painful.”

The CME FedWatch Tool, which tracks futures markets to predict the Fed’s future moves, in October put the probability of another Fed rate hike on Dec. 13 at 30 percent. On Wednesday, futures markets saw no chance of a December rate hike and a 25 percent chance that the Fed will start lowering rates by March.

Futures markets predict Fed easing this spring

Futures market expectations for federal funds rate level on May 1, 2024. The Fed last raised its target for the short-term benchmark to 5.25 percent and 5.50 percent in July. Source: CME FedWatch Tool

Futures markets are pricing in a 58 percent chance that the Fed will ease rates by as much as half a percentage point by May 1, 2024.

“We’re sticking to our call for the first easing in March, but we doubt Chair Powell will quickly declare victory,” Shepherdson and Clancy said in their latest bulletin.

While the downward trend in mortgage rates could continue to boost homebuyer demand, MBA Deputy Chief Economist Joel Kan noted in a statement that there’s still a long way to go before things are back to normal.

Joel Kan

“Both purchase and refinance applications increased to the highest weekly pace in five weeks but remain at very low levels,” Kan said of last week’s survey results. “Despite the recent downward trend, mortgage rates at current levels are still challenging for many prospective homebuyers and current homeowners.”

But demand for refinancing was up 2 percent from the previous week and 7 percent from a year ago, boosting the share of refinancing applications to 31.9 percent of all loan requests, up from 31.4 percent the week before. Requests for adjustable-rate mortgage (ARM) loans accounted for 8.8 percent of all applications.

For the week ending Nov. 10, 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 7.61 percent, unchanged from the week before. But with points decreasing to 0.67 from 0.69 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans, the effective rate decreased.
  • Rates for 30-year fixed-rate jumbo mortgages (loan balances greater than $726,200) averaged 7.65 percent, up from 7.58 percent the week before. With points increasing to 0.67 from 0.65 (including the origination fee) for 80 percent LTV loans, the effective rate also increased.
  • For 30-year fixed-rate FHA mortgages, rates averaged 7.36 percent, unchanged from the week before. With points decreasing to 0.85 from 0.91 (including the origination fee) for 80 percent LTV loans, the effective rate decreased.
  • Rates for 15-year fixed-rate mortgages averaged 6.94 percent, down from 6.98 percent the week before. Although points increased to 1.00 from 0.88 (including the origination fee) for 80 percent LTV loans, the effective rate also decreased.
  • For 5/1 ARMs, rates averaged 6.65 percent, down from 6.76 percent the week before. With points decreasing to 0.72 from 0.80 (including the origination fee) for 80 percent LTV loans, the effective rate also decreased.

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Email Matt Carter

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