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Mortgage rates continue to retreat from their 2023 highs and would-be homebuyers are seizing the day, with applications for purchase loans surging by a seasonally adjusted 5 percent last week from the week before, the Mortgage Bankers Association (MBA) reported Wednesday.

Purchase loan applications tracked by the MBA’s weekly survey of lenders have now posted weekly gains for four consecutive weeks. But demand for purchase mortgages remained down 19 percent from a year ago, MBA Deputy Chief Economist Joel Kan noted for perspective.

In addition, applications to refinance were down 9 percent last week from the week before, and were up only 1 percent from the anemic levels registered at the same time a year ago.

Joel Kan

“The purchase market remains depressed because of the ongoing, low supply of existing homes on the market,” Kan said in a statement. “Similarly, refinance activity will likely be muted for some time, even with the recent decline in rates, as many borrowers locked in much lower rates in 2020 and 2021.”

Last week’s survey, which included an adjustment for the Thanksgiving holiday, covered the week ending Nov. 24, when mortgage rates were dropping for the fourth time in five weeks, to the lowest level in 10 weeks.

Since then, rates have continued to slide, with daily rate lock data tracked by Optimal Blue showing 30-year fixed-rate mortgages averaging 7.10 percent Wednesday. That’s the lowest level since Sept. 1, and a 73 basis-point drop from a 2023 peak of 7.83 percent registered on Oct. 25

Mortgage rates continue retreat from peaks

At 7.48 percent, rates on jumbo mortgages too big for purchase by Fannie Mae and Freddie Mac were down 75 basis points Wednesday from their Oct. 26 peak of 8.23 percent.

Rates for FHA loans have dipped below 7 percent, falling 57 basis points from their Oct. 30 peak to 6.92 percent Wednesday.

Mortgage rates are coming down as bond market investors who fund most mortgages become increasingly convinced that the Federal Reserve is getting a handle on inflation and is not only done hiking rates, but may reverse course and begin lowering rates in the spring. When investors pile into bonds and mortgage-backed securities, the heightened demand sends bond prices higher and brings yields down.

Mortgage rates registered their biggest one-day drop in nearly four years on Nov. 14 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.

Bond market investors bet on Fed easing

Source: Yahoo Finance.

Yields on 10-year Treasury notes, a barometer for mortgage rates, have dropped sharply this week as evidence that inflation is easing continues to pile up and Federal Reserve policymakers acknowledge that rate cuts are a possibility. At 4.27 percent, 10-year Treasury yields were down 20 basis points Wednesday from last week’s highs.

A Commerce Department report Wednesday estimating that gross domestic product (GDP) growth surged to 5.2 percent during the third quarter — the strongest growth since Q4 2021 — did not faze investors.

Many economists expect growth has already slowed, and the personal consumption expenditures (PCE) price index, a crucial benchmark that Fed policymakers want to see at 2 percent, registered 3 percent annual growth during October.

Selma Hepp

“Today’s revised GDP numbers reflect the fact that the economy hasn’t completely slowed down yet,” CoreLogic Chief Economist Selma Hepp said, in a statement. “The Fed will be pleased GDP remains strong while it continues to get inflation under control. However, all eyes are on reports due tomorrow that show the expectation that jobless claims are rising while incomes and personal spending are both dropping. This indicates that the economy is headed toward a so-called soft landing, which is a moderate slowdown in economic activity but not a full-blown recession.”

Bond market investors also seemed to be encouraged Tuesday by remarks Federal Reserve Governor Christopher Waller made at an event hosted by the American Enterprise Institute.

Waller, who is seen as a hawk on inflation, said in his prepared remarks that he sees signs that inflation is easing and that the Fed would be open to cutting rates if the trend continues.

“Consumer price index (CPI) inflation for October was what I want to see,” Waller said. “For the month, there was no inflation, prices were virtually flat, and unlike earlier moments where improvements were concentrated in some goods and services, the moderation in inflation was broadly distributed.”

In a question and answer session, Waller acknowledged that he was “stung by this third quarter [GDP] number,” referring to the Commerce Department’s advance estimate that GDP grew by 4.9 percent in the third quarter.

“I think everybody was [surprised],” Waller said. “We’re at 2 percent, 2 percent, 2 percent, 2 percent, 2 percent and then almost five? But now all the forecasts I’m seeing, all the data that’s coming in, [GDP is] going to be probably 1 to 2 percent in the fourth quarter, depending on which one you’re looking at.”

Waller said it’s a given that the Fed will start to bring short-term rates down once policymakers feel confident that inflation is trending down toward policymakers’ goal of 2 percent.

“So there’s certainly good economic arguments from any kind of standard Taylor rule, it would tell you if we see this inflation [trend] continuing for several more months — I don’t know how long that might be three months, four months, five months — that we feel confident that inflation is really down and on its way [to the Fed’s 2 percent target] that you could then start lowering the policy rate just because inflation is lower,” Waller said. “It has nothing to do with trying to save the economy or recession, it’s just consistent with every policy rule I know from my academic life and as a policymaker.”

Futures markets predict spring rate cut

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.

The CME FedWatch Tool, which tracks futures markets to predict the odds of the Fed’s next moves, showed investors see a 78 percent chance of one or more cuts in the federal funds rate by May 1 from the Fed’s current target of 5.25 percent to 5.5 percent.

Futures markets are less certain about the prospects for Fed easing by March 20, on Nov. 29 pricing in a 48 percent chance of one or more Fed rate cuts by March 20. But that’s up from 27 percent on Nov. 22 and 14 percent at the end of October.

Economists who put together two of the real estate industry’s most closely watched forecasts agree that mortgage rates have probably peaked, but are sharply divided on how quickly they’ll come down over the next two years.

Mortgage rate forecasts diverge

Source: Fannie Mae and MBA forecasts, November 2023.

In their Nov. 21 forecast, economists at Fannie Mae indicated that they take Federal Reserve policymakers at their word that they intend to pursue a “higher for longer” rate strategy, which would keep mortgage rates above 7 percent next year.

But forecasters at the Mortgage Bankers Association projected in a Nov. 17 forecast that mortgage rates will fall to the mid-6 percent range by the end of next year and drop into the mid-fives by the end of 2025.

Editor’s note: This story has been updated to correct that the the personal consumption expenditures (PCE) price index is the Federal Reserve’s preferred measure of inflation, and that the PCE registered 3 percent annual growth during October.

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Email Matt Carter

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