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To the chagrin of real estate agents, falling mortgage rates are getting more homeowners interested in refinancing, but haven’t done much to spur homebuyers into action.
Purchase mortgage applications were down by a seasonally adjusted 5 percent last week when compared to the week before, and 8 percent from a year ago, according to a weekly survey of lenders by the Mortgage Bankers Association (MBA).
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It was the weakest homebuyer demand for mortgages since February, MBA Deputy Chief Economist Joel Kan said, noting that home sales have slowed despite rising inventory levels.
Although requests to refinance were down 15 percent from the previous week, refi demand was still up by 90 percent from a year ago.
Joel Kan
“Even with lower mortgage rates, potential buyers might be more selective now that there are more options,” Kan said in a statement.
But mortgage rates look like they have more room to fall, with the Fed expected to kick off a rate-cutting campaign less than a month from now.
Minutes of the Federal Reserve Open Market Committee’s July meeting, released Wednesday, reveal that last month, the “vast majority” of central bank policymakers were already thinking that it would “likely be appropriate” to cut rates on Sept. 18 if inflation data kept coming in as expected.
That was before the release of two surprisingly weak jobs reports at the beginning of August, which prompted investors to buy up mortgage-backed securities (MBS) as a hedge against a possible recession.
Federal Reserve Chair Jerome Powell could confirm that a September rate cut is in the cards when he delivers his annual remarks to central bankers gathering in Jackson Hole, Wyoming, on Friday.
Economists at Fannie Mae and the Mortgage Bankers Association agree that the Fed is poised to begin cutting rates next month, and are forecasting that rates on 30-year fixed-rate mortgages will continue trending down and drop below 6 percent by the fourth quarter of next year.
Rates could come down faster than forecasters have been expecting after an annual benchmarking of employment data showed the U.S. may have added 818,000 fewer jobs over the last year than previously thought.
Futures markets tracked by the CME FedWatch tool show that investors who fund most mortgage loans are already certain the Fed will cut rates next month. The question has become not if the Fed will cut, but by how much.
The CME FedWatch tool showed futures markets investors on Wednesday were pricing in a 100 percent chance of a Sept. 18 Fed rate cut and a roughly one-in-three chance (36.5 percent) that policymakers will bring rates down by half a percentage point, rather than 25 basis points.
On July 19, futures markets put the odds of a 50-basis point rate cut at just 4 percent. A 50-basis point cut would bring the federal funds overnight rate down by half a percentage point, to between 4.75 and 5 percent.
Pantheon Macroeconomics Chief Economist Ian Shepherdson still sees a 50-basis point cut in September as a long shot.
Ian Shepherdson
“Presumably, the latest data will have emboldened the doves and quietened the hawks, so we expect Chair Powell Friday effectively to confirm the September easing … though we think he will seek to dampen expectations of [a 50 basis-point cut] as well as reiterating that the Fed is data-dependent and does not make decisions in advance,” Shepherdson said in an email to clients. “We’re not sure who will be listening.”
Shepherdson thinks Fed policymakers will be ready to cut rates by 50 basis points in November and December, for a total of 1.25 percentage points in cuts this year.
Futures markets see only a 33 percent chance that the Fed will cut rates that drastically this year, but a 77 percent chance for three rate cuts totaling one percentage point.
Mortgage rates keep falling
At 6.43 percent Tuesday, rates on 30-year fixed-rate conforming mortgages were down 84 basis points from a 2024 high of 7.27 percent registered on April 25, according to rate lock data tracked by Optimal Blue. A basis point is one-hundredth of a percentage point.
Rates have fallen by 1.4 percentage points from a post-pandemic high of 7.83 percent on Oct. 25, 2023.
Many borrowers who took out loans at those higher rates are already good candidates for refinancing.
In their latest forecast, economists at Fannie Mae said they’re expecting refinancing volume to grow by 51 percent this year, to $374 billion, and by another 68 percent in 2025, to $627 billion.
Economists at the mortgage giant don’t see home sales picking up significantly until next spring, but project sales will be up 8.5 percent next year, to 5.19 million.
CPI at lowest level since March 2021
After falling for four consecutive months to 2.9 percent annual growth in July, the Consumer Price Index is back to levels not seen since March 2021. Core CPI, which excludes volatile food and energy prices, has also been moving in the right direction since April, falling to 3.2 percent in July.
The Producer Price Index for final demand increased 2.2 percent for the 12 months ended in July, according to the Bureau of Labor Statistics.
The Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) price index, dropped to 2.5 percent in June from a year ago — just half a percentage above the Fed’s 2 percent target.
The PCE price index for July, which is derived from the CPI and PPI reports, is scheduled to be released on Aug. 30.
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