By Ann Saphir
(Reuters) – The yield on the most popular U.S. mortgage fell to a 15-month low last week after the Federal Reserve signaled it could begin cutting its policy rate in September. A downturn in the labor market also bolstered financial markets’ expectations that the reduction in borrowing costs would be significant.
The average contract rate on a 30-year fixed-rate mortgage fell 27 basis points in the week ended Aug. 2 to 6.55%, the Mortgage Bankers Association said Wednesday. That was the lowest rate since May 2023 and the sharpest drop in two years.
The decline offers potential homebuyers long-awaited relief in a market that has become increasingly unaffordable in recent years as both home prices and borrowing costs have risen.
That unaffordability was also reflected Wednesday in the July housing sentiment index from Fannie Mae, the government-sponsored mortgage finance company. Just 17% of respondents said it was a good time to buy a home, down from 19% in June, Fannie Mae said.
In addition, 35% said they would rather rent than buy their next home, the highest percentage since 2011.
“At this point, it’s difficult to say whether this is simply a reflection of buyer fatigue or a greater sense of dissatisfaction with the market. However, we believe it could have important implications if this trend continues,” Doug Duncan, Fannie Mae’s chief economist, said in a statement.
GOLF REFINANCING
The drop in interest rates is also giving some people who bought homes when rates were higher the option to refinance and lower payments. The average rate on the MBA 30-year mortgage peaked at 7.9% last October.
Refinance applications surged to a two-year high, the MBA said Wednesday. That helped push the refinance share of total loan application volumes to 41.7% — the highest level since the week of the Fed’s first rate hike in March 2022.
However, buying activity rose less than 1% as there were too few homes for sale, pushing up prices.
The Fed, whose aggressive anti-inflation campaign in 2022 and 2023 has pushed borrowing costs to their highest levels in decades, signaled last week that cooling price pressures and a slowing labor market mean a policy rate cut could be on the table as early as next month. The U.S. central bank has kept its policy rate in a range of 5.25%-5.50% for more than a year.
Two days after the Fed’s last policy meeting, the Labor Department’s monthly jobs report showed the U.S. unemployment rate rose to 4.3% in July and employment fell, raising fears that a recession was imminent or perhaps already underway.
The fears caused a stock slide that continued through global markets into Monday, before equities recovered somewhat on Tuesday. Major U.S. stock indices were higher again on Wednesday.
Last week’s labor market data also led to a rally in U.S. Treasuries, pushing down yields on those bonds (which move inversely to bond prices). Mortgage rates also fell, providing a ray of hope for millions of American households looking for new homes, cheaper housing, or both.
INTEREST RATE CUTS ARE COMING
While the Fed left interest rates unchanged at its July meeting, the post-meeting policy statement showed the focus is now as much on the health of the labor market as on curbing inflation.
That change in communication has led to lower mortgage rates, Mary Daly, president of the Federal Reserve Bank of San Francisco, said Monday. Investors are now anticipating the central bank’s next move.
“You can already see the policy working, even before we lower the rates,” she said.
Interest rate futures now reflect bets that the Fed will cut its policy rate by a total of a full percentage point by the end of this year, starting with a half-percentage-point cut next month.
According to Intercontinental Exchange’s ICE Mortgage Monitor, more than 4 million mortgages issued since 2022 have interest rates of 6.5% or higher.
But more than six in 10 mortgages have interest rates below 4%, according to data from Freddie Mac, the government-sponsored mortgage giant. That suggests that for a large share of homeowners, mortgage rates would have to fall much further to make the cost of refinancing worthwhile, or to entice them to buy a new home and put their current house on the market.
(Reporting by Ann Saphir; additional reporting by Dan Burns; editing by Leslie Adler and Paul Simao)
