– Loan originators are uncertain whether mortgage rates will fall through the end of 2023
– The market reacted to Federal Reserve Chair Jerome Powell’s comments as dovish, leading to speculation of rate cuts
– Powell’s comments indicated progress in bringing inflation down but emphasized that the committee is not considering rate cuts
– The direction of mortgage rates will depend on incoming data, such as the Consumer Price Index (CPI) and retail sales numbers
– If CPI numbers come in higher than expected, mortgage rates may increase
– Despite falling mortgage rates, the impact on lenders is expected to be minimal
– Refinance applications may increase with lower mortgage rates, but a significant increase would require rates to fall below 7%
– The spread between mortgage rates and Treasury yields remains wider than usual
– Mortgage rates are forecasted to end 2023 at 7.2% by the MBA and 6.8% by Fannie Mae
– Affordability is improved with declining rates, but the lack of housing inventory and higher prices remain challenges
– Loan originators hope that the end of 2023 will be more favorable than the previous year, when rates sharply increased.
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.”
Property Chomp’s Take:
Hey there, mortgage enthusiasts! Let’s talk about the burning question on everyone’s minds: Will mortgage rates fall through the end of 2023? It’s no secret that the high-rate environment has put a damper on loan origination volume for much of this year. But is there hope for a reprieve?
Well, according to economists, the recent comments made by Federal Reserve Chair Jerome Powell at the latest Federal Open Market Committee (FOMC) press conference were interpreted as dovish by the market. This led to speculation that rates might be cut soon. However, experts like Fannie Mae Chief Economist Doug Duncan believe that Powell’s comments were more balanced, indicating progress in bringing down inflation but also acknowledging upside risks. Powell explicitly stated that the committee is not currently considering rate cuts.
So, what’s the verdict on mortgage rates? It’s uncertain at this point. The direction of the 10-year Treasury yield and mortgage rates will depend on incoming data, such as the Consumer Price Index (CPI) and retail sales numbers. Danielle Hale, chief economist at Realtor.com, points out that mortgage rate changes are based on expectations, which can shift dramatically relative to actual data.
Hale suggests that the CPI report for October, set to release on November 14, could push mortgage rates up if the numbers come in higher than expected. On the other hand, if inflation remains subdued, the streak of declining mortgage rates might continue into December. Economists from Fannie Mae and the Mortgage Bankers Association (MBA) expect the Federal Reserve to hold rates steady in its last 2023 FOMC meeting scheduled for December 12-13.
Now, let’s address the big question: Will this be enough to boost mortgage origination? With mortgage rates falling, homebuyers are starting to see an opportunity to enter the market while demand is lower. John Crivea II, a certified mortgage advisor and loan originator, has already seen a significant increase in leads in the past week and anticipates more activity on the horizon.
However, economists caution that the decline in rates won’t have a substantial impact on lenders. A 25-basis-point drop (a quarter of a percent) is unlikely to shift the game significantly. According to Duncan, rates would need to fall below 6% to see a noticeable increase in production volume. Refinance applications tend to pick up when mortgage rates drop, but for a mini refi boom, rates would need to fall below 7%. Given that rates have only exceeded 7% since August, the number of homeowners needing to refinance due to a slight dip is limited.
The spread between mortgage rates and Treasury yields remains wider than usual due to various factors, such as market conditions. The MBA’s baseline forecast predicts mortgage rates to end 2023 at 7.2%, drop to 6.1% by the end of 2024, and reach 5.5% by 2025. Fannie Mae expects the average 30-year fixed-rate mortgage to land at 6.8% in 2023, rising to 6.9% in 2024.
While any decline in rates improves affordability, loan originators stress that the lack of housing inventory and higher home prices remain significant challenges. However, they’re hopeful that the end of 2023 will be better than the same period last year when mortgage rates spiked above 7%, causing a major slowdown in origination business.
So, let’s keep our fingers crossed for a more favorable year ahead. The fourth quarter and the first quarter are historically challenging for the mortgage industry, but experts believe that the pain experienced last year due to the sudden increase in rates won’t be repeated. With any luck, we’ll see a brighter future for loan originators and homebuyers alike. Stay tuned for updates!