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Potential Drop in Mortgage Rates Looming (video)

Mortgage rates have been a significant factor impacting the housing market. Recently, there have been notable changes and expectations surrounding these rates, which are expected to lead the way lower ahead of an anticipated Federal Reserve rate cut.

Sold Home For Sale Sign in Front of New House

Here’s a detailed look at the current situation based on insights from Matt Graham, Chief Operating Officer at Mortgage News Daily.

Current Housing Market Trends

Mortgage rates have been hovering above 7%, causing pressure on the housing market. This high rate has led to a 2% drop in purchase applications for the week ending May 10. Additionally, home builder sentiment saw a decline in April, marking the first decrease since November, and reached its lowest point since January.

Despite these challenges, falling yields have given a boost to builders, with the ITB (iShares U.S. Home Construction ETF) seeing a rise and Wells Fargo increasing its price target for Toll Brothers to $150 per share.

Impact on Home Building

The high mortgage rates have significantly affected home building. According to Matt Graham, if there is relief in rates, it will benefit both home purchases and refinances. He suggests that even a 1% drop in rates could have a considerable impact.

While a drop of more than ten basis points was observed following recent CPI data, a drop below 7% would be a more substantial relief, helping to reinvigorate the market.

Market Acclimation to High Rates

The market has somewhat acclimated to the current high rates. Initially, the rise to this range caused a rapid decrease in volume. However, now, those who need to buy homes are proceeding with purchases despite the higher rates.

There have been three instances of false starts in the market where rates appeared to decrease but then rebounded. Graham notes that as long as inflation remains controlled, the highs of late 2023 might represent a peak driven by excessive defensiveness and fear.

Home Builders and Inventory Constraints

Given the current rate environment, home builders remain the primary players in the market. Many homeowners with low rates are reluctant to sell, limiting the inventory of existing homes and placing the responsibility on home builders to meet demand.

This trend is likely to continue unless there is a significant move in rates or housing prices.

Potential Policy Changes and Election Impact

As the election season approaches, housing affordability is likely to become a topic of political discussion. While there have been some inconsequential proposals, substantial changes in government policy affecting housing costs and financing are challenging to implement quickly.

Any significant impact would likely require initiatives that guarantee lower interest rates, affecting the overall cost of borrowing.

Future Projections for Mortgage Rates

Looking ahead, the market is closely watching economic data to predict the Federal Reserve’s actions. If the data suggests that the Fed will cut rates, mortgage rates are expected to lead the way lower. Long-term rates, including Treasury yields, will likely move lower in anticipation of the Fed’s actions.

This proactive adjustment by the market can provide early relief to borrowers, potentially revitalizing the housing market.


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