Will falling mortgage rates entice potential homebuyers off the sidelines?

Mortgage rates this week saw the biggest one-week decline in a year and potential homebuyers waiting for rates to drop responded, said Josh Mettle, division president and co-creator of NEO Home Loans.

“I think we were up right around 15% increase in the number of initial mortgage applications. That doesn’t take into consideration the number of buyers that had already applied and were sitting on the sidelines. They’ve also re-entered the home-buying process,” Mettle told HousingWire.

Many homebuyers are aware of the lack of inventory of existing homes for sale, he explained. Because of that, they want to avoid any potential bidding wars by getting back into the market earlier rather than waiting for mortgage rates to drop further.

Following the Federal Reserve’s decision to hold interest rates steady, the 10-year Treasury yield – the primary driver in the rise of longer-term interest rates – have been on the downswing. The 30-year, conventional fixed mortgage rate hit 7.48% on Friday, down from 7.55% a month ago, HousingWire’s Mortgage Rates Center showed.

The biggest question in the minds of loan originators is whether mortgage rates will fall through the end of 2023, providing some reprieve from the high-rate environment that has stifled origination volume for much of the year.

What’s going on with mortgage rates?

Economists pointed out that the market interpreted Federal Reserve Chair Jerome Powell’s comments at the latest Federal Open Market Committee (FOMC) press conference as dovish compared to his previous remarks.

“The way I interpret what has happened, post-press conference for Powell, is that the market is going back to their behavior from earlier this year, where they kept signaling to the Fed that we want rate cuts,” Fannie Mae Chief Economist Doug Duncan told HousingWire. “So the fact that the Fed didn’t raise rates, the market rushed to say, ‘well, rates are going to get cut.’ The decline in the 10-year Treasury yield is simply that response,”

Duncan added that Powell’s comments were balanced, indicating that there has been progress in bringing inflation down but upside risk to inflation remained. Most importantly, Powell emphasized that the committee is not thinking about rate cuts.

“It will not surprise me at all if there’s some intervening speeches that push rates back up on the 10-year Treasury yield,” Duncan said.

Speaking on Nov. 9 – a little more than a week after the Fed held benchmark rates steady – Powell said that the central bank is not confident it has done enough to bring inflation down.

“My colleagues and I are gratified by this progress but expect that the process of getting inflation sustainably down to 2% has a long way to go,” Powell said on Thursday, addressing the International Monetary Fund audience in Washington, D.C.

The 10-year Treasury yield rose after the speech, largely driven by a bad bond auction, but the bond market fell from the peak of Thursday, noted Logan Mohtashami, HousingWire’s lead analyst.

“The bad bond auction on Thursday took yields and rates higher, and Powell’s hawkish tone kept rates up there, but yields on Friday morning fell just a little,” Mohtashami said. “It’ll be interesting to see what the (market) reaction will be to the next (CPI) report.”

Where are mortgage rates headed?

The direction of the 10-year Treasury yield and mortgage rates will depend on the incoming data – including the Consumer Price Index (CPI) and retail sales numbers, economists emphasized.

Danielle Hale, chief economist at Realtor.com, noted that the economy is in the monetary cycle where mortgage rate changes are based on “expectations which can shift in outsized fashion relative to changes in the actual data.”

The CPI report for October 2023 – set to release on Nov. 14 – could push mortgage rates up if CPI numbers come in higher than expected, Hale projected.

Headline inflation is broadly expected to be subdued month over month, partly due to oil prices easing from their late-September highs.

The streak of declining mortgage rates may continue into December if the next few inflation readings come in as expected, Hale projected.

Although Q3 economic growth came in “quite strong” at an annualized 9.4% rate and several job market indicators continue to show strength, as long inflation cools, the central bank is likely to pause at this level for some time, said Michael Fratantoni, MBA’s chief economist.

Fannie Mae and the MBA both expect the Fed to hold rates steady in its last 2023 FOMC meeting scheduled Dec. 12-13.

Is this enough to prop up mortgage origination?

With mortgage rates falling, homebuyers are starting to realize that this may be a great time for them to get into the market while there’s lower demand, said John Crivea II, certified mortgage advisor and loan originator at Mpire Financial Group.

Crivea II saw more than a triple increase in the number of leads in the past week and sees more activity on the horizon.

“If the rates drop more and more people get more excited and come back into the market, now you’re going to be back to where we were two years ago with multiple offers in the five to 10 range,” Crivea II said.

The welcome relief in mortgage rates, however, won’t help lenders a whole lot, economists expected.

“The change of 25 basis points (bps) or a quarter of a percent, puts a very few households in the game versus out of the game. So it’s not a game-changer. If rates fell below 6%, then you’d see a pick-up in production volume,” Duncan said.

Refinance applications tend to pick up when mortgage rates drop, Hale noted. But for the industry to see a mini refi boom, mortgage rates would need to fall below 7%.

“Mortgage rates have only exceeded 7% since August, and, given the sluggishness in home sales in recent months, there aren’t many homeowners who would need to refinance by a smaller dip,” Hale said.

The spread between mortgage rates and Treasury yields remains roughly 120 basis points wider than typical, due to a combination of factors, Fratantoni noted.

MBA’s baseline forecast is for mortgage rates to end 2023 at 7.2%, reach 6.1% at the end of 2024 and drop to 5.5% by 2025. Fannie Mae expects the average 30-year, fixed-rate mortgage to land at 6.8% in 2023 and move up to 6.9% in 2024.

Loan originators emphasized any decline in rates improves affordability while the lack of housing inventory and higher home prices will continue to be a challenge.

LOs are hopeful that the end of 2023 will be different from the same period last year when their origination business was paralyzed, largely due to mortgage rates sharply surpassing the 7% mark.

“We saw extreme pain last year at this time because a 7% mortgage was just absolutely shocking at that point after 3% rates. Nobody had gotten acclimated to that higher interest rate environment because it happened so fast,” Neo’s Mettle said.

“The fourth quarter and the first quarter are always the most challenging for the mortgage industry. People believe that rates peaked just above 8%. I think it’s going to be a much more favorable year for those reasons.”