Easing expectations help! Can the plunge in US mortgage rates reignite the real estate market?
2024-08-08
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As the sluggish employment data triggered recession concerns, the market significantly raised its expectations for the Fed's interest rate cuts, and the 50 basis point rate cut in September has been fully digested. Last week, the most popular 30-year home loan rate in the United States plummeted to its lowest level in 15 months. As a result, mortgage applications increased significantly. While easing expectations of the Fed will ease the pressure on home buyers, it is also expected to break the current sluggish market environment and consumer sentiment, thereby boosting the industry's prospects.
Loan interest rates fell sharply
The Mortgage Bankers Association (MBA) said Wednesday that the average contract rate for 30-year mortgages fell 27 basis points to 6.55%. That was the lowest level since May 2023 and the biggest weekly drop in two years. Meanwhile, the 15-year loan rate fell to 6.03% from 6.27% the previous week, and the rate on adjustable-rate mortgages fell to 5.91% from 6.22%.
After the Federal Reserve's interest rate meeting, the U.S. Department of Labor's monthly employment report showed that the unemployment rate jumped to 4.3% in July, sparking concerns that a recession is imminent or even underway. As a result, the 2-year and 10-year U.S. Treasury yields fell by more than 40 basis points in a single week, dragging down the closely related mortgage rates, which brought a glimmer of hope to millions of American families looking for new homes.
To cope with post-epidemic inflationary pressure, the Federal Reserve has aggressively raised interest rates in 2022 and 2023, pushing the federal funds rate to its highest level since the 1980s, and has kept the policy rate within the range of 5.25%-5.50% since the second half of last year.
As house prices and borrowing costs rise, the U.S. housing market has become increasingly unaffordable. The latest data shows that new home sales in the U.S. housing market in June were 51,000, the lowest since November 2023, and existing home sales have fallen year-on-year for 34 consecutive months. In terms of house prices, the median price of new homes continued to rise month-on-month, while the median price of existing homes hit a record high for two consecutive months.
Fannie Mae's July housing sentiment index also shows this situation. Fannie Mae said that only 17% of respondents said now is a good time to buy a home, down from 19% in June. In addition, 35% said they would continue to rent rather than buy a home, the highest proportion since 2011.
“At this point, it’s hard to tell if this is simple buyer fatigue or a larger sense of disappointment with the market, but we think it could have important implications if this trend continues,” Fannie Mae Chief Economist Doug Duncan said in a statement.
Market awaits turnaround
Last week, the Fed kept interest rates unchanged for the eighth time in a row. The resolution statement deleted the commonly used phrase of "high attention to inflation risks" and instead acknowledged that policymakers are now "focused on the two-way risks of their dual mandate." Fed Chairman Powell said at a subsequent press conference that a September rate cut is already in sight, as long as there is further progress in economic data.
Such hopes have been boosted by a loosening in the job market, and have been hinted at in speeches by several Fed officials. San Francisco Fed President Mary Daly said this week that the Fed will be ready to take necessary actions for the economy once the situation becomes clear. She believes policy adjustments will be necessary in the coming quarters.
Federal funds rate futures show that the market has priced in more than 100 basis points in interest rate cuts by the Federal Reserve this year, and the Fed may need to cut interest rates continuously to deal with potential risks facing the economy.
People in the U.S. real estate market believe that recent economic uncertainty, high housing prices and high interest rates continue to suppress sales, and while buyers are on the sidelines, the "lock-in effect" has suppressed supply.
With the Federal Reserve expected to resume rate cuts, some buyers who entered the market when interest rates were higher have the option of refinancing and reducing their payments. In October last year, the 30-year mortgage rate reached 7.9%. The MBA said the refinancing index jumped nearly 16% last week to a two-year high of 661.4. Mortgage applications for home purchases rose 0.8%, the first increase in a month. The overall index of mortgage applications, which includes refinancing and home purchases, rose 6.9%, reaching its highest level so far this year.
According to Intercontinental Exchange's ICE Mortgage Monitor, more than 4 million mortgages have interest rates of 6.5% or higher since 2022. According to Freddie Mac's data, more than 60% of mortgages in the United States have interest rates below 4%. This shows that for a large proportion of homeowners, mortgage rates still need to fall significantly to make the refinancing cost worthwhile, attracting them to buy new homes and put existing homes on the market to drive liquidity.
(This article comes from China Business Network)
