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Demand for purchase mortgages picked up last week for the second week in a row as would-be homebuyers took advantage of falling mortgage rates, but rates are headed back up this week after worrisome inflation data cast doubt on the timing of expected Federal Reserve rate cuts.

Applications for purchase loans were up by a seasonally adjusted 5 percent last week when compared to the week before, but down 11 percent from a year ago, according to a weekly survey of lenders by the Mortgage Bankers Association (MBA).

The MBA survey had previously shown purchase loan applications surging by a seasonally adjusted 11 percent during the week ending March 1, reversing five consecutive weeks of declines as mortgage rates retreated from 2024 highs.

Mike Fratantoni

“Mortgage rates dropped below 7 percent last week for most loan types because of incoming economic data showing a weaker service sector and a less robust job market, with an increase in the unemployment rate and downward revisions to job growth in prior months,” MBA Chief Economist Mike Fratantoni said in a statement.

Falling mortgage rates were an even bigger incentive for homeowners looking to refinance their existing mortgage, with refi applications picking up by 12 percent last week, to a level 5 percent greater than a year ago. Applications to refinance government-backed FHA, VA and USDA loans surged by 24 percent.

“While these percentage increases are large, the level of refinance activity remains quite low, and we expect that most of this activity reflects borrowers who took out a loan at or near the peak of rates in the past two years,” Fratantoni said.

Refi applications accounted for 31.6 percent of all mortgage requests last week, up from 30.2 percent the week before, while adjustable-rate mortgage (ARM) loans accounted for 7.7 percent of total applications.

Mortgage rates are on the rise again this week after Tuesday’s release of the latest Consumer Price Index (CPI), which showed inflation remained at a stubbornly high 3.2 percent in February.

Mortgage rates on the rise again

Loan lock data tracked by Optimal Blue showed borrowers were locking in rates on 30-year fixed-rate mortgages Tuesday at an average rate of 6.74 percent, up 24 basis points from a 2024 low of 6.50 percent registered on Feb. 1.

Optimal Blue data shows rates have a ways to go before reclaiming a 2024 peak of 6.93 percent registered on Feb. 28, let alone the 2023 high of 7.83 percent registered on Oct. 25.

Yields on 10-year Treasurys, which are a good indicator of where mortgage rates are headed next, continued to climb Wednesday, with bond market investors increasingly convinced that the Fed won’t cut rates until June.

The CME FedWatch Tool, which tracks futures markets to gauge the odds of the Fed’s next moves, on Wednesday showed investors seeing only a 10 percent chance of a May rate cut, down from 34 percent on Feb. 13. Futures markets on Wednesday were pricing in a 65 percent chance of one or more rate cuts by June 12, down from 74 percent on Feb. 13.

Rising shelter costs and gasoline prices contributed more than 60 percent of February’s CPI increase. But core inflation, which excludes volatile food and energy prices, fell to 3.8 percent annually, down from 3.9 percent in January.

Economists at Pantheon Macroeconomics said the drop in core inflation “was less convincing than we expected,” but does not “change the big picture, which remains one of downward pressure on core inflation via slowing wage growth, normalized supply chains, and the end of the post-pandemic surge in gross margins.”

In their latest U.S. Economic Monitor, Pantheon economists said Tuesday that they still expect 10-year Treasury yields to fall by nearly a full percentage point by the end of the year, to 3.25 percent.

There will be bumps in the road — airline fares jumped by 3.6 percent in February, and car rental costs were up 3.8 percent — but Pantheon economists think they’re unlikely to be sustained.

“The bottom line here is that slowing wage inflation will push down the trend in most core non-rent services over the course of this year, regardless of what happens in individual months,” Pantheon economists wrote. “Every indicator we follow points to much slower wage gains, and that’s much more important than occasionally wild behavior in a few components.”

The Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, is much closer to reaching the Fed’s 2 percent inflation target, dropping to 2.4 percent in January.

PCE and Core PCE trending down

Core PCE, which excludes the cost of food and energy and can be a more reliable indicator of underlying inflation trends, dipped to 2.8 percent, the lowest reading since March 2021. The PCE index for February will be released on March 29.

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

  • Rates for 30-year fixed-rate conforming mortgages (loan balances of $766,550 or less) averaged 6.84 percent, down from 7.02 percent the week before. With points decreasing to 0.65 from 0.67 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans, the effective rate also decreased.
  • For 30-year fixed-rate jumbo mortgages (loan balances greater than $766,550), rates averaged 7.04 percent, down from 7.21 percent the week before. Although points increased to 0.38 from 0.36 (including the origination fee) for 80 percent LTV loans, the effective rate also decreased.
  • Rates for 30-year fixed-rate FHA mortgages averaged 6.77 percent, down from 6.86 percent the week before. Although points increased to 0.95 from 0.90 (including the origination fee) for 80 percent LTV loans, the effective rate also decreased.
  • For 15-year fixed-rate mortgages, rates averaged 6.37 percent, down from 6.66 percent the week before. Although points increased to 0.77 from 0.67 (including the origination fee) for 80 percent LTV loans, the effective rate also decreased.
  • Rates for 5/1 ARM loans averaged 6.38 percent, unchanged from the week before. With points decreasing to 0.52 from 0.67 (including the origination fee) for 80 percent LTV loans, the effective rate decreased.

The “spread” between conforming and jumbo mortgage rates has grown wider this year, as worries about commercial real estate loans have weighed on regional banks, which are major providers of home loans that are too big for Fannie Mae and Freddie Mac.

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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