Ruben Gonzalez

Apache is functioning normally

hikesterson/Getty Images; Illustration by Issiah Davis/Bankrate

After topping 8 percent in October, mortgage rates beat a hasty retreat in November. The average rate on 30-year loans fell under 7.5 percent in Bankrate’s most recent survey of lenders.

“Market sentiment has significantly shifted over the last month, leading to a continued decline in mortgage rates,” says Sam Khater, chief economist at mortgage company Freddie Mac.

One key reason for the reversal: Investors bid down 10-year Treasury yields, the main indicator for 30-year fixed mortgage rates.

Another factor is inflation, which was down to 3.2 percent for October. While that’s still above the Federal Reserve’s official target of 2 percent, forecasters think the Fed is done raising rates, a shift that will relieve some of the pressure on mortgages.

“If the Fed signals an end to interest rate hikes and takes on a dovish tone, there may be some downward pressure on mortgage rates,” says Odeta Kushi, economist at title insurer First American. “But don’t expect any large declines in mortgage rates until inflation is much closer to the Fed’s 2 percent target or there’s a decline in economic activity.”

Mortgage rate predictions December 2023

The downward momentum in mortgage rates will be sustained, albeit modestly, as the Federal Reserve signals they are done raising interest rates and projects slower inflation in 2024. Cautious projections from the Fed about the timing of rate hikes, along with the elevated volume of Treasury issuance, will be offsetting factors that limit the extent of decline in mortgage rates.
— Greg McBride, Bankrate Chief Financial Analyst

Many forecasts now call for rates to stick in the 7 percent range, either at 7.5 or higher.

“While mortgage rates have trended down from their peak in October, they remain above 7 percent and will likely stay there for some time,” says Ruben Gonzalez, chief economist at real estate brokerage Keller Williams.

As inflation cools and the Federal Reserve stands down, rates should drift down to 7 percent, says Lisa Sturtevant, chief economist at Bright MLS, a real estate listing service in the Mid-Atlantic region.

“Part of it is the Federal Reserve is pausing on interest rate hikes,” says Sturtevant. “Of course, mortgage rates are affected by things other than what the Fed does. For example, mortgage applications are down, and lenders are competing for a shrinking pool of applicants.”

After rising sharply through late October, mortgage rates have trended back down. The average rate on a 30-year mortgage was 7.4 percent as of Nov. 29, according to Bankrate’s survey. This represents a departure from 8.01 percent on Oct. 25.

Bankrate’s weekly mortgage rate averages differ slightly from the statistics reported by Freddie Mac, the government-sponsored enterprise that buys mortgages and packages them as securities. Bankrate’s rates tend to be higher because they include origination points and other costs, while Freddie Mac removes those figures and reports them separately. However, both Bankrate and Freddie Mac report similar overall trends in mortgage rates.

When will mortgage rates go down?

While the experts we talked to don’t expect rates to come down significantly this month, they do forecast an eventual easing in 2024. The Mortgage Bankers Association projects rates to fall to 6.1 percent late next year. The National Association of Realtors estimates rates will be at 6.3 percent in a year, while Fannie Mae forecasts they’ll be at 7.1 percent.

Still, mortgage rates aren’t easy to predict.

“A lot of us forecasted we’d be down to 6 percent at the end of 2023,” says Sturtevant. “Surprise, surprise, we’re not.”

One wild card has been the unusually large gap between mortgage rates and 10-year Treasury yields. Normally, that spread is about 1.8 percentage point, or 180 basis points. This year, the gap has been more like 280 basis points, pushing mortgage rates a full percentage point higher than the 10-year benchmark indicates.

“There is room for that gap to narrow,” says Sturtevant, “but I’m not sure we’ll get back to those old levels. In this post-pandemic economy, the old rules don’t seem to apply in the same ways. We’re sort of figuring out what the reset is. Investors have a different outlook on risk now than they did before the pandemic. We’re just in this weird transition economy.”

What to do if you’re getting a mortgage now

Mortgage rates are at generational highs, but the basic advice for getting a mortgage applies no matter the economy or market.

  • Improve your credit score. A lower credit score won’t prevent you from getting a loan, but it can make all the difference between getting the lowest possible rate and more costly borrowing terms. To help qualify for a conventional mortgage, you’ll generally need a score of 620 or higher. However, the best mortgage rates go to borrowers with the highest credit scores, usually at least 740. In general, the more confident the lender is in your ability to repay the loan on time, the lower the interest rate it’ll offer.
  • Save up for a down payment. Putting more money down upfront can help you obtain a lower mortgage rate, and if you have 20 percent, you’ll avoid private mortgage insurance (PMI), which adds costs to your loan. If you’re a first-time homebuyer and can’t cover a 20 percent down payment, there are specific loans, grants and programs that can help. The eligibility varies by program, but often are based on factors like your income.
  • Understand your debt-to-income ratio. Your debt-to-income (DTI) ratio compares how much money you owe to how much money you make, specifically your total monthly debt payments against your gross monthly income. Not sure how to figure out your DTI ratio? Bankrate has a calculator for that.
  • Check out different mortgage loan types and terms. A 30-year fixed-rate mortgage is the most common option, but there are shorter terms. Adjustable-rate mortgages have also regained popularity recently.

FAQ

  • It might seem like a bank or lender are dictating mortgage terms, but in fact, mortgage rates are not directly set by any one entity. Instead, mortgage rates grow out of a complicated mix of economic factors. Lenders typically set their rates based on the return they need to make a profit after accounting for risks and costs.

    The Federal Reserve doesn’t directly set mortgage rates, but it does set the overall tone. The closest proxy for mortgage rates is the 10-year Treasury yield. Historically, the typical 30-year mortgage rate is about 2 percentage points higher than the 10-year Treasury yield. In 2023, that “spread” has been more like 3 percentage points.

  • Mortgage rates have jumped to 23-year highs, so not many borrowers are opting to refinance their mortgages in late 2023. However, if rates come back down in the near future, homeowners could start looking to refinance.

    Deciding when to refinance is based on many factors. If rates have fallen since you originally took out your mortgage, refinancing might make sense. A refi can also be a good idea if you’ve improved your credit score and could lock in a lower rate or lower fees. A cash-out refinance can accomplish that as well, plus give you the funds to pay for a home renovation or other expenses.

Source: bankrate.com

Apache is functioning normally

While some feel yesterday’s Federal Open Market Committee decision to raise short-term rates by 25 basis points is likely to be the last of this cycle, others are expecting another hike at some point in 2023.

The Fed’s actions this week had already been baked into the 10-year Treasury, which closed on Tuesday at 3.91%, 17 basis points higher from the July 19 close. The latest raise is likely to have little impact on mortgage rates, which are already close to the top, said Bill Cosgrove, the president and CEO of Union Home Mortgage.

“We expect rates should start to trend down. We think it’s going to be slow,” added Ruben Gonzalez, the chief economist at Keller Williams. “We aren’t expecting a lot of movement before the end of the year.” But there’s still the potential for volatility in how mortgage rates move as various pieces of data come out.

While a good case can be made for this being the last hike by the FOMC, Gonzalez added he doesn’t believe it will hesitate to push short-term rates higher if the data points to the need for that.

The 10-year fell 6 basis points on Wednesday (the closing price is posted at 3 p.m. Eastern time, one hour after the FOMC made its announcement), but had started rising again in trading on Thursday morning, as U.S. government data estimated second quarter gross domestic product at a 2.4% annual gain, with the first quarter’s updated to 2%.

The positive GDP report “I think gives them continued room to raise rates if they feel it’s necessary,” Gonzalez said.

Freddie Mac’s Primary Mortgage Market Survey put the average for the 30-year fixed rate loan at 6.81% as of July 27, up 3 basis points from 6.78% seven days prior. For the same week in 2022, the rate was 5.3%.

The 15-year FRM was at 6.11%, a 5 basis point week-to-week increase from 6.06% and 153 basis points higher than 4.58% year-over-year.

Higher rates continue to dampen housing activity. “However, overall U.S. consumer confidence is unwavering, surging to a two-year high in the Conference Board’s Consumer Confidence Index for July 2023,” Freddie Mac Chief Economist Sam Khater said in a press release. “Rising consumer confidence often leads to greater spending, which could drive more consumers into the housing market.

But because pent-up demand co-exists with the inventory shortage, the FOMC’s latest move is not a detriment to the housing market, Cosgrove said.

He was chairman of the Mortgage Bankers Association in 2015 and one of his talking points even then was the multiyear existence of a housing shortage. Not only has that not been dealt with, the pandemic-driven rush has added to the deficit and those dynamics aren’t likely to change any time soon.

Even if mortgage rates were to move down 25 or 50 basis points, the shift would not free up a large amount of homes already owned by borrowers hanging on to their low rate, Gonzalez noted. “We’re going to be in a stable but continually depressed market in terms of the sales of existing homes.”

Controlling inflation and wages have been the FOMC’s primary goals. But there is an extreme labor shortage, especially in some sectors like health care. “And then obviously, with the housing shortage of single-family homes, you’re not getting any price relief, or very little price relief there,” Cosgrove said.

So reducing inflation to the decades-old 2% target will be difficult for Fed Chair Jay Powell to achieve.

“If they would adjust their thinking to 3% as a target, you would have a better chance of having a soft landing of the economy, but at a continued 2% target, they may not be done with rate hikes and that’s concerning,” Cosgrove explained.

Current mortgage rates are being affected as “investors weigh the risk that an increase in the Fed’s benchmark short-term rate may not be its last,” said Orphe Divounguy, senior macroeconomist at Zillow Home Loans. “Although the latest inflation reading shows price growth is moving toward the Federal Reserve’s target, the slower pace of disinflation, stubbornly high nominal wage growth, and the recent uptick in economic activity suggest the inflation battle may not be won yet.”

As of Thursday morning, Zillow’s tracker had the 30-year fixed rate mortgage at 6.54%, one basis point lower than the prior week’s average of 6.55%.

Mortgage rates are likely to remain elevated until the FOMC sees more evidence suggesting core inflation is still moderating, Divounguy said in a separate statement.

While it may not happen at the next meeting, Cosgrove expects the FOMC to push rates up another 25 basis points during this year.

The Fed’s next steps will be based on what the data shows over the next two months, noted Melissa Cohn, regional vice president of William Raveis Mortgage, in a statement. The next FOMC meeting is on Sept. 19 and 20.

“The Fed looks for inflation to continue to moderate as the high rate environment begins to take its toll on employment and consumer spending; both having been surprisingly resilient to date,” Cohn said.

She thinks 2% is an achievable target, but likely many months down the road. However, “we will hopefully see mortgage rates begin to settle down soon,” Cohn said.

Jobs and inflation are now moving in a direction that could make this the Fed’s last hike in the current cycle, said Mike Fratantoni, the MBA’s chief economist, in a statement.

“We expect that to be the case, but for the Fed to hold off on any rate cuts until we are well into 2024,” Fratantoni said. “We do expect mortgage rates to trend down once the FOMC clearly signals that they have reached the peak for this cycle, as the reduction in uncertainty with respect to the direction of rates should narrow the spread of mortgage rates relative to Treasury benchmarks.”

Based on the 10-year Treasury being at 3.94% as of 11:25 a.m. Thursday morning and the Freddie Mac PMMS, the current spread is about 287 basis points; normal is in the range of 150 basis points to 200 basis points.

“In the housing context, the stability afforded by a pause mindset in the back half of the year should help shrink the spread between the 10-year Treasury and 30-year FRM, providing relief after a spring of skyrocketing rates; however, we will still see tension in the short term,” said Dan Burnett, head of Investor Strategy at Hometap Equity Partners, in a statement.

The outlook for further Fed rate hikes this year remains unclear, with the market currently pricing it at under 50%, said a Keefe, Bruyette & Woods analyst report from Bose George, Christopher McGratty, David Konrad and Catherine Mealor.

“Given this interest rate backdrop, mortgage volumes are likely to remain under pressure through year-end 2023 as rates remain elevated,” KBW said. “This is challenging for mortgage volume-dependent names (title insurers/mortgage originators) but constructive for mortgage servicers.”

Source: nationalmortgagenews.com

Apache is functioning normally

After a year’s worth of warnings about a recession, Federal Reserve chair Jerome Powell said Wednesday that the central bank’s staff no longer forecasts a nationwide economic downturn. It’s welcome news for the economy to achieve a soft landing, a scenario in which inflation falls, unemployment remains relatively low and a recession is avoided.

Housing activity, however, will be limited as the impact of tighter policy continues to reverberate through the economy, housing experts and economists projected following the Fed’s decision to raise interest rates by 25 basis points on Wednesday. 

Mortgage rates are expected to remain elevated until inflation moves to a level more consistent with the Fed’s mandate. High mortgage rates have triggered a rate lock-in effect across the country – disincentivizing homeowners to move and finance their new home with higher rates. 

“High mortgage rates triggered by the Fed’s policy have caused more sellers to sit on the sidelines given the large differential between the rate they enjoy on their current home compared to the possible interest rate on any home they may purchase today,” said Marty Green, principal at Polunsky Beitel Green, a law firm for residential mortgage lenders.

Data from Redfin showed that about 92% of homeowners have a rate below 6% and a record 60% of mortgage holders have lived in their home for four years or less – further contributing to the supply shortage.

“Higher mortgage rates change the trade-up calculation for existing homeowners and are keeping as many as 1 in 7 out of the market because they don’t want to give up their existing low rate,” Danielle Hale, chief economist at Realtor.com noted. 

Existing home sales dropped to a seasonally adjusted annual rate of 4.16 million in June from the previous month. Year-over-year, sales dipped 18.90% from 5.13 million in June 2022.

Hale expects the number of home homes for sale to decline this year, and continue to be a damper on home sales. 

“A large swath of outstanding mortgages has below-market rates, and this has led to a restriction in the supply of existing homes for sale,” Ruben Gonzalez, chief economist at Keller Williams, said.

During his press conference with reporters, Powell acknowledged that the housing market has cooled due to high rates, but also said it “has a ways to go” before home prices fall.

Powell also said more supply was coming. Though housing starts boomed in May and fell slightly to a seasonally adjusted 1.43 million units last month, supply is mostly coming from multifamily rental construction. Permitting data suggests future multifamily supply is slowing and developers of such projects are highly sensitive to high interest rates.

For now, first-time homebuyers are the most impacted group as higher mortgage rates cut into their purchasing power. 

High rates have made affordability exceedingly challenging, and low inventory in return increased competition, especially at lower price points.

The combined impact of higher rates and higher home prices has driven the cost of financing the typical listed home up more than $250 or 12.4% from a year ago; and up more than $1,100 or 96.5% from June 2020, nearly doubling the cost in three years, Hale noted. 

It’s not just the buyers that are getting sidelined. 

Renters are expected to get hit with higher rental rates, according to Justin Barry, partner at Morris, Manning & Martin.

While the Fed is attempting to stave off inflation by raising interest rates, it could actually have the opposite effect on rents, according to Barry.

“With each round of rate hikes, the Fed puts increasing pressure on multifamily properties with floating-rate loans or maturing fixed-rate loans. Many owners are attempting to pass along the increased financial burdens to tenants by increasing rental rates, provided that demand in a particular submarket supports higher rental rates,” Barry said.

With affordability challenges to persist, demand for new housing construction will follow.

“The onus is on homebuilders, as well as municipal, state and federal authorities, to take steps that will increase construction activity of owner-occupied single-family and multifamily housing to ease the affordability burden on would-be homeowners,” Kyle Enright, president of lending at Achieve, said.

Last hike of the year? The housing industry hopes so

While Powell emphasized any future policy decisions would be made on a meeting-by-meeting basis and that in the current environment, there is expectation that the central bank will pause its rate hike for this year.

“The Fed sounded surprised that we have disinflation factors without a hit to the labor market, which is positive because they might believe now they don’t need a job loss recession to help inflation data improve,” Logan Mohtashami, lead analyst at HousingWire said.

During a press conference with reporters on Wednesday, Powell said the Fed has “seen the beginnings of disinflation without any real costs in the labor market.”

​​Although inflation dropped to 3% in June, it is still above the Fed’s goal of 2%. Hiring still remains strong and the unemployment rate is hovering at very low levels. 

If jobless claims get better, they might hike one more time, but they’re sounding more confident than they’re restrictive now, Mohtashami said.

“It could be the last one for a while,” Melissa Cohn, regional vice president of William Raveis Mortgage, said.

Although the Fed previously signaled it was looking at one or two more increases this year, “we’re starting to see other weaknesses in the economy” and that may put the Fed on a pause after this month’s rate hike, Cohn noted.

Goldman Sachs projected that the FOMC will ultimately remain on hold at the September meeting as the committee leadership has advocated for a “careful pace” of tightening.

“If the Fed isn’t careful, this critical industry may once again slow to crawl in the fall and winter,” Green said. 

Source: housingwire.com

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