Mortgage rates may have already peaked as inflation cools

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After climbing above 7 percent last week to new 2023 highs, mortgage rates are poised to ease with Wednesday’s release of new economic data showing a key inflation metric eased in June.

At 3 percent annual growth, the latest Consumer Price Index readout from the Bureau of Labor Statistics shows inflation slowing for the 12th consecutive month in June. That’s easing fears that the Federal Reserve will have to keep hiking rates and keep them high to cool down the economy.

The CME FedWatch tool, which tracks futures markets to predict the Fed’s next move, shows investors pricing in a 95 percent chance that the Fed will hike rates one more time on July 26. But investors see only a 13 percent chance of another 25-basis point increase in the short-term federal funds rate on Sept. 20, down from 22 percent on Tuesday.

“Inflation is cooling, which is welcome news for consumers and the Federal Reserve, even though the level of prices is still elevated,” economists at KPMG wrote of their take on the latest numbers. “The Fed will hike rates in July and reassess over the summer. It is now expected to skip September and revisit the decision in November. We are close to the peak in rates for the year.”

Source: Yahoo Finance

Yields on 10-year Treasurys, a barometer for mortgage rates, slipped 12 basis points on the news to well below 4 percent. That’s about where they were at the beginning of the month before strong jobs numbers and GDP growth sent mortgage rates soaring to new 2023 highs last week.

Black Knight’s Optimal Blue Mortgage Market Indices, which track daily rate lock data, show rates on 30-year fixed-rate conforming mortgages hit a 2023 high of 7.02 percent on Friday before retreating back below 7 percent this week.

A weekly survey of lenders by the Mortgage Bankers Association shows homebuyer demand for purchase loans was up by a seasonally adjusted 2 percent last week when compared to the week before.

“Incoming economic data continue to send mixed signals about the economy, with the overall impact leaving Treasury yields higher last week as markets expect that the Federal Reserve will need to hold rates higher for longer to slow inflation,” MBA Deputy Chief Economist Joel Kan said in a statement.

In a note to clients, Pantheon Macroeconomics Chief Economist Ian Shepherdson said he expects inflation to cool less slowly in the second half of the year — headline inflation was 5.9 percent in September and has dropped nearly two percentage points in the past two months. But the trends are clear, he said, predicting “the hike later this month will be the last in the cycle.”

“It will also be a mistake,” Shepherdson said. “The Fed does not need to hike again.”

Fannie Mae’s most recent monthly National Housing Survey shows that most Americans are resigned to high home prices and mortgage rates, with only 1 in 3 Americans surveyed in June expecting home prices to come down in the next 12 months and only 16 percent expecting mortgage rates to ease.

Mortgage rates expected to ease



Source: Fannie Mae and the Mortgage Bankers Association forecasts

“No one on the Fed expects to cut rates this year but if current trends persist — a big if — we could see an earlier cut in rates in 2024,” KPMG economists said of Wednesday’s CPI numbers. “The current forecast has the Fed cutting in May 2024.”

But the Fed doesn’t exert direct control over mortgage rates, which are determined largely by investor appetite for bonds and mortgage-backed securities (MBS). Expectations of future Fed actions can have a more immediate impact on markets for bonds and MBS, with increased investor demand driving prices up and yields down.

Fannie Mae and MBA economists do expect mortgage rates will ease this year and next. In a June 20 forecast, MBA economists predicted rates on 30-year fixed-rate mortgages will drop to an average of 5.8 percent during the final three months of this year. In their latest forecast, Fannie Mae economists don’t see that happening until the third quarter of 2024.

The ups and downs in mortgage rates have played havoc with mortgage lenders who have seen the refinancing boom of the coronavirus pandemic give way to a market dependent on serving homebuyers, many of whom face affordability challenges.

That’s shifted demand for loans to mortgages that allow homebuyers to put down smaller down payments, including those offered by FHA and VA lenders.

Changing mortgage loan product mix

Source: Black Knight Originations Market Monitor, June 2023

Conforming loans eligible for purchase by Fannie Mae and Freddie Mac continue to be the most popular choice with borrowers, accounting for 58.5 percent of June rate locks, according to the latest Black Knight Originations Market Monitor.

But conforming loans commanded more than 70 percent of the market at the outset of the pandemic as Federal Reserve policies drove interest rates down and many homeowners rushed to refinance.

By last June, rebounding mortgage rates had brought an end to the refi boom, and conforming loans accounted for just 57 percent of rate locks. FHA and VA loans that are popular with homebuyers accounted for 29.7 percent of June rate locks, up 4 percentage points from a year ago.

Nonconforming loans that don’t meet Fannie and Freddie’s strict underwriting standards or exceed the mortgage giants’ maximum loan limits accounted for 11.3 percent of June rate locks, down from 16.4 percent a year ago.

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