With FOMC hike baked in, mortgage rates sink

February 2, 2023

Mortgage rates moved down another four basis points this week, as the markets anticipated the 25 basis point increase the Federal Open Market Committee announced on Wednesday.

The Freddie Mac Primary Market Survey for Feb. 2 found the average for the 30-year fixed rate mortgage at 6.09%, down from 6.13% one week prior. The 15-year FRM averaged 5.14%, compared with 5.17% for Jan. 26.

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For the same week in 2022, the rates were 3.55% and 2.77% respectively.

Rates, which have now dropped four weeks in a row, are down nearly a full percentage point from their peak at 7.08% on Nov. 10.

"According to Freddie Mac research, this one percentage point reduction in rates can allow as many as three million more mortgage-ready consumers to qualify and afford a $400,000 loan, which is the median home price," Sam Khater, its chief economist, said in a press release.

Any further FOMC cut is likely to go "meeting-by-meeting," said Fannie Mae Chief Economist Doug Duncan, in a discussion last week with National Mortgage News reporters. But given that this latest increase was "well advertised," the mortgage market already baked it into current loan pricing.

Duncan expects another 25 basis point reduction at the next meeting.

The short-term rates controlled by the FOMC should peak at about 5% by March, added Mike Fratantoni, chief economist at the Mortgage Bankers Association, in a statement.

"But long-term rates, including 30-year mortgage rates are a function of market expectations for the path of the economy," Frantoni said. "And investors are betting that the economic slowdown and the Fed's eventual victory over inflation will result in lower rates over time."

The MBA's current forecast is for the 30-year FRM to end the year close to 5%.

"[It's] premature to declare an outright victory, but it is a positive sign that we only saw 0.25 points and we're here without job claims breaking," said Dan Richards, executive vice president of Flyhomes Mortgage, in a statement. "In the short term, we shouldn't see much movement in mortgage rates based on [Wednesday's] hike." 

However, yields on the 10-year Treasury sank after the announcement, and spreads to the 30-year FRM are already abnormally large, which could bring further drops.

The 10-year closed at 3.53% on Tuesday. By noon on Thursday, it was down to 3.36%.

"If evidence over the coming months suggests that inflation is on a consistent downward trend, mortgage rates may continue to decline and activity in the housing market will pick up — just in time for spring home-buying season," said First American Deputy Chief Economist Odeta Kushi in a statement. "If high inflation proves more stubborn, especially in the service sector, the Fed may respond by further tightening the screws on monetary policy, putting upward pressure on mortgage rates."

Zillow's rate tracker put the 30-year FRM at 5.7 on Thursday morning, down 22 basis points from one week prior and 9 basis points from the previous day.

"Waning economic indicators and fears that the Fed may go too far in its battle against inflation are likely driving the decline," said Orphe Divounguy, senior macroeconomist at Zillow Home Loans, in a statement issued Wednesday night.

Keefe, Bruyette & Woods is also looking at the FOMC pausing after one more rate hike.

"Despite [Fed Chairman Jerome] Powell's statement that ongoing rate hikes would be appropriate, the press conference was interpreted as dovish, which resulted in risk-on sentiment; stocks rallied, the yield curve steepened, and notably, mortgages outperformed their hedges and [primary-secondary] spreads tightened 12 basis points," a note from KBW's Bose George said.

Mortgage clients of the law firm of Polunsky Beitel Green, while also expecting a 25 basis point increase in March, are now hoping the Fed is positioned to pause rate hikes then, rather in May.

"While interest rate-sensitive businesses like auto sales and mortgage companies may welcome this development, it could indicate that the long-predicted recession may be here sooner rather than later," said Marty Green, a principal at the firm.

Both the 10-year yield and mortgage rates are falling because the markets are perceiving an increased risk of recession. "Upcoming releases on wage growth, the services industry and inflation expectations are likely to keep mortgage rates volatile, but additional signs of weakness in economic data should continue to apply downward pressure," Zillow's Divounguy said. 

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