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Mortgage rates keep falling, but would-be homebuyers were no more inclined to apply for a loan last week, according to the Mortgage Bankers Association’s weekly survey of lenders.

After adjusting for seasonal factors, requests for purchase mortgages were down 1 percent last week compared to the week before, and 18 percent lower than a year ago.

With rates dropping on positive inflation news, lenders who offer Veterans Administration (VA) loans made a big push to encourage homeowners to refinance, but refi applications were down 2 percent week over week.

Mike Fratantoni

“At least as of last week, borrowers’ response to this rate move was rather tepid,” MBA Chief Economist Mike Fratantoni said, in a statement. “VA refinance applications jumped 18 percent for the week, but otherwise, both refinance and purchase applications showed small declines.”

Requests to refinance accounted for close to 40 percent of all mortgage applications (39.7 percent), up from 31.2 percent during the week ending Oct. 27, when mortgage rates were near their 2023 peaks.

Demand for purchase loans has picked up in five of the last seven weeks, as mortgage rates continue their dramatic retreat from October highs.

Yields on long-term government bonds and mortgage-backed securities that fund most home loans have been falling on expectations that the Fed might begin lowering short-term interest rates as soon as next spring. Federal Reserve policymakers anticipate three rate cuts by the end of next year, but investors and some economists think the central bank may cut faster and harder.

Mortgage rates down 1.15 percentage points

Rates on 30-year fixed-rate loans averaged 6.68 percent Tuesday, down 1.15 percentage points from a 2023 peak of 7.83 percent, according to daily rate lock data tracked by Optimal Blue.

Mortgage rates have come a hair faster than long-term bond yields in recent weeks, as the “30-10 spread” — the difference between rates on 30-year fixed rate mortgages and 10-year Treasurys — narrows.

Shrinking ’30-10 spread’ speeds mortgage relief

At 2.75 percentage points as of Oct. 11, the 30-10 spread was 76 basis points above the pre-pandemic average of 1.99 percent, but down 28 basis points from a post-pandemic high of 3.03 percent registered Oct. 12, 2022. Source: Optimal Blue and Federal Reserve data retrieved from FRED, Federal Reserve Bank of St. Louis.

The wide gap between Treasury yields and mortgage rates has been driven at least in part by the elevated prepayment risk faced by MBS investors, who stand to lose money if homeowners who took out loans when rates were peaking refinance when mortgage rates come down.

As rates fall, prepayment risk diminishes, and as the 30-10 spread inches back down closer to historical norms, that could give additional momentum to the decline in mortgage rates.

Lower rates forecast for 2024

Source: Fannie Mae and Mortgage Bankers Association forecasts, December 2023.

In a Dec. 12 forecast, MBA economists projected rates on 30-year fixed-rate loans will drop to 6.6 percent during Q2 2024, in time for some spring homebuyers to take advantage, and continue falling below 6 percent by Q1 2025.

A month ago, Fannie Mae forecasters didn’t expect to see mortgage rates below 7 percent until mid-2025. In their Dec. 11 forecast, positive inflation data prompted the mortgage giant’s economists to revise their outlook. Fannie Mae economists now expect 30-year fixed-rate loans will dip to an average of 6.5 percent during Q4 2024, and fall to 6.1 percent by the final three months of 2025.

Forecasters at Fannie Mae and the MBA also expect a mild recession to hit in early or mid-2024.

As inflation eases, the Fed will need to cut short-term rates just to keep “real rates” — interest rates adjusted for inflation — neutral.

“Fed officials will not seek to maintain real interest rates heading up towards 3 percent and more as inflation drops to the target,” economists at Pantheon Macroeconomics said in their Dec. 20 U.S. Economic Monitor report. “No one thinks today’s economy can stand real
rates anywhere near that level, and policymakers will act to prevent it from happening.”

Economists at Pantheon, Fannie Mae and the MBA all expect the ongoing decline in mortgage rates will boost home sales over the next few months.

“But a durable recovery cannot start until rates fall much further, likely in the second half of next year,” Pantheon economists said.

For the week ending Dec. 15, the MBA reported average rates for the following types of loans:

  • Rates for 30-year fixed-rate conforming mortgages (loan balances of $726,200 or less) averaged 6.83 percent, down from 7.07 percent the week before. Although points increased to 0.60 from 0.59 (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 $726,200), rates averaged 7.12 percent, down from 7.22 percent the week before. Although points increased to 0.55 from 0.37 (including the origination fee) for 80 percent LTV loans, the effective rate also decreased.
  • Rates for 30-year fixed-rate FHA mortgages popular with first-time homebuyers averaged 6.65 percent, down from 6.84 percent the week before. With points decreasing to 0.69 from 0.72 (including the origination fee) for 80 percent LTV loans, the effective rate also decreased.
  • For 15-year fixed-rate mortgages, rates averaged 6.41 percent, down from 6.67 percent the week before. Although points increased to 0.77 from 0.58 (including the origination fee) for 80 percent LTV loans, the effective rate also decreased.
  • Rates for 5/1 adjustable-rate mortgages (ARMs) averaged 6.33 percent, down from 6.47 percent the week before. With points decreasing to 0.57 from 0.76 (including the origination fee) for 80 percent LTV loans, the effective rate also decreased.

ARM loan applications accounted for 6.3 percent of all mortgage applications last week, unchanged from the week before but down from 10.7 percent during the week ending Oct. 27, when mortgage rates were near 2023 peaks.

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Email Matt Carter

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