Mortgage Rates Are Bouncing Back, And Buyers Don’t Like It

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After retreating from 2024 highs during the first half of May, mortgage rates are again on the rise as Federal Reserve policymakers remain skeptical that inflation has been vanquished.

With rates on conventional mortgages eligible for purchase by Fannie Mae and Freddie Mac already headed back above 7 percent, demand for purchase loans is wilting, and some forecasters have scaled back their expectations for a rebound in 2024 home sales.

The spring homebuying season would typically be winding down at this time of year. But even after adjusting for seasonal factors, applications for purchase loans were down 1 percent last week compared to the week before, according to a weekly survey of lenders by the Mortgage Bankers Association.

Joel Kan

“Mortgage rates increased for the first time in four weeks, with the 30-year fixed rate up to 7.05 percent and all other loan types also seeing increases,” MBA Deputy Chief Economist Joel Kan said, in a statement. “The uptick in rates led to a decline in mortgage applications heading into Memorial Day weekend.”

TAKE THE INMAN INTEL INDEX SURVEY FOR MAY

Both purchase and refinance applications fell, Kan noted, pushing overall activity to the lowest level since early March. While applications to refinance were down 14 percent week over week, refi applications were still up 12 percent from a year ago.

Purchase loan requests, however, were down 10 percent from a year ago, following three consecutive week-over-week declines in purchase loan applications to lenders tracked by the MBA survey.

“Borrowers remain sensitive to small increases in rates, impacting the refinance market and keeping purchase applications below last year’s levels,” Kan said. “There continues to be limited levels of existing homes for sale and many buyers are struggling to find listings in their price range that meet their needs.”

Mortgage rates headed back up

Data tracked by Optimal Blue showed rates on 30-year fixed-rate conforming mortgages averaged 6.99 percent Tuesday, up 12 basis points from this month’s low of 6.87 percent, registered on May 15.

After hitting a 2024 high of 7.27 percent on April 25, rates on conforming loans had been in retreat in May on hopes that Federal Reserve policymakers might soon be ready to start lowering rates to keep the economy from cooling too fast and lurching into a recession.

But more recent data showing renewed strength in the job market and growth in the services and manufacturing sectors — coupled with hawkish remarks from Fed policymakers who aren’t convinced inflation is at bay — has bond market investors who fund most mortgages betting against interest rate cuts anytime soon.

At the end of April, investors still thought there was a slim chance that the Fed would cut rates in June or July. This week, futures markets tracked by the CME FedWatch Tool put the odds of a September rate cut at less than even. While investors are still pricing in a 60 percent chance of one or more rate cuts by Nov. 7, that’s down from 70 percent on May 22.

At the beginning of the year, futures markets were expecting the Fed to implement six 25-basis point rate cuts totaling 1.5 percentage points. Now futures markets expect only a 37 percent chance of more than one 25 basis point rate cut this year.

Recent data denting the odds of Fed rate cuts include initial jobless claims dipping on May 11 and May 18, and a May 23 report from S&P Global Market Intelligence that showed business activity growth accelerated sharply in May, to the fastest pace in more than two years.

Chris Williamson

“The U.S. economic upturn has accelerated again after two months of slower growth, with the early PMI data signaling the fastest expansion for just over two years in May,” S&P Global Market Intelligence Economist Chris Williamson said in the report. “The data put the U.S. economy back on course for another solid GDP gain in the second quarter.”

“What’s interesting is that the main inflationary impetus is now coming from manufacturing rather than services, meaning rates of inflation for costs and selling prices are now somewhat elevated by pre-pandemic standards in both sectors to suggest that the final mile down to the Fed’s 2 percent target still seems elusive.”

Last week, Federal Reserve Governor Christopher Waller said he wants to see “several more months of good inflation data” before he’d be ready to cut rates, and other Fed policymakers have expressed similarly hawkish views.

Philip Jefferson

“It is too early to tell whether the recent slowdown in the disinflationary process will be long lasting,” Federal Reserve Vice Chair Philip Jefferson said at last week’s MBA conference in New York. “The better reading for April is encouraging.”

Addressing bankers and economists in Tokyo on Tuesday, Governor Michelle Bowman said she also has reservations about the Fed’s plans to dial back on “quantitative tightening,” the ongoing runoff of the central bank’s $7 trillion balance sheet.

The Fed’s balance sheet swelled to nearly $9 trillion during the pandemic, as it bought $120 billion in government debt and mortgage-backed securities every month to keep interest rates low during the pandemic.

As it began raising interest rates in early 2022, the Fed also set a goal of trimming $60 billion in Treasurys and $35 billion in mortgages from its balance sheet each month by letting maturing assets roll off its books.

Following through on guidance Fed Chair Jerome Powell provided in March, on June 1 the Fed will slow the pace of balance sheet tightening, and trim its holding of Treasurys by just $35 billion a month.

While the Fed hasn’t adjusted its initial goal of shedding $35 billion in mortgages each month, it’s been unable to hit that target in recent months. With higher rates slowing the pace at which borrowers refinance their mortgages, only $15 billion in mortgages are maturing each month.

So instead of trimming its balance sheet by $95 billion a month as planned in 2022, the Fed is poised to dial back quantitative tightening to less than half that amount in June — $35 billion in Treasurys and $15 billion in mortgages.

Fed to slow pace of ‘quantitative tightening’

Source: Board of Governors of the Federal Reserve System, Federal Reserve Bank of St. Louis.

Bowman said that in her view, the Fed should have scaled back its purchases of Treasurys and mortgage-backed securities during the pandemic (“quantitative easing”) sooner than it did. And she thinks the Fed is now relaxing quantitative tightening sooner than it should.

Continuing to trim the Fed’s balance sheet will give the Fed more leeway if it needs to launch another round of quantitative easing to deal with a future crisis, she said.

Michelle Bowman

“While it is important to slow the pace of balance sheet runoff as reserves approach ample levels, in my view, we are not yet at that point,” Bowman said. “In my view, it is important to continue to reduce the size of the balance sheet to reach ample reserves as soon as possible and while the economy is still strong. Doing so will allow the Federal Reserve to more effectively and credibly use its balance sheet to respond to future economic and financial shocks.”

The Fed’s purchases of mortgage-backed securities helped bring rates on home loans down to historic lows during the pandemic. But Bowman said she’s pleased that Fed policymakers are in agreement that, in the long run, the Fed should get rid of most, if not all, of its mortgage holdings.

When outlining their principles for quantitative tightening in 2022, Fed policymakers said they intended to hold primarily Treasury securities on the Fed’s balance sheet, to minimize the central bank’s impact on lending across the economy.

“I strongly support this principle,” Bowman said of the current policy to reinvest any principal payments from agency MBS holdings above the current runoff cap into Treasurys. “And once balance sheet runoff concludes, my expectation is that proceeds from agency MBS holdings would continue to be reinvested in Treasury securities in order to facilitate a transition of the Federal Reserve’s balance sheet holdings to consist of primarily Treasury securities.”

With rates headed back up and looking more likely to stay there, forecasters at Fannie Mae have scaled back their expectations for 2024 home sales.

Fannie Mae, MBA differ on where rates are headed

Just a month ago, Fannie Mae economists said they expected rates on 30-year fixed-rate loans to drop to 6.4 percent by the end of this year and to 6 percent during the second half of next year.

In a May 13 forecast (released publicly on May 21), Fannie Mae economists said they don’t see rates on 30-year fixed-rate loans dropping below 7 percent until next year, and falling less dramatically to an average of 6.6 percent in Q4 2025.

Doug Duncan

“The question our economics team is asked most frequently by industry participants remains where we think mortgage rates are headed,” Fannie Mae Chief Economist Doug Duncan said in a statement. “For now, we see rates remaining closer to 7 percent through the end of the year — before trending downward in 2025 — but note potential downside to that forecast given recent actual movements in rates.”

In a May 16 forecast, MBA economists said they’re still confident mortgage rates have room to drop to 6.5 percent by the end of this year, and below 6 percent by the end of 2025.

Fannie Mae forecasters now expect 4.89 million 2024 home sales, down from an April projection of 4.96 million, followed by an 8 percent bump in 2025 sales, to 5.29 million.

“Our consumer survey suggests that households who are paying attention to the housing market continue to take a wait-and-see approach,” Duncan said. “This is consistent with our latest housing forecast, which does not foresee a dramatic change in activity until affordability improves. Given ongoing supply constraints and recent indications that the labor market may be weakening, a downward movement in mortgage rates appears to be the likeliest lever to achieve an improvement in affordability.”

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Email Matt Carter