Even as the Fed held policy steady at its July meeting but suggested that rate cuts will soon come, financial markets have suddenly become worried that the economy is faltering. Whether the central bank is falling behind the curve is certainly a matter of concern, and some folks may have preferred to see the Fed make a move last week rather than wait. While it's likely too soon to have grave concerns, market reactions last week simply reinforced the idea that getting inflation back down to 2% was likely to be a less-than-smooth process, even if it mostly has been so far.
Given the difficult housing climate, the 4.8% increase in the National Association of Realtors Pending Home Sales Index for June was a bit of a surprise. Existing home prices hit a record high last month and mortgage rates were little better than they were in May, but the number of homes for sale has been improving, so perhaps some potential homebuyers saw it as their best chance to jump into the market. Of course, it bears considering that not all signed contracts make it all the way to the closing table, so before you pencil in a sharp pickup in home sales for July or August (reports due later this month and in September, respectively) it is likely that the size of the bump may be more muted than the June PHSI would suggest. Still, with the sluggish pace of existing home sales this spring, any pickup in activity would be welcome.
Given how financial markets reacted to both the Fed and the spate of softer data this week, we'll likely see a pickup in mortgage applications next week and perhaps beyond. This wasn't the case in the latest available week, though, as the Mortgage Bankers Association reported a 3.9% decline in requests for mortgage credit in the week ending July 26. Applications for loans to purchase houses slipped by 1.5% for the week, while those to refinance existing loans slumped 7.2%. If late-week mortgage rates decline hold for a bit, we'd expect to see at least some pickup in refinance activity, even as mortgage rates will remain high.
You wouldn't know it from the reactions of investors last week, though, as they stamped out of stocks and into bonds, Major stock indexes slumped hard and oil prices retreated on what was said to be a diminished outlook for demand. Bonds benefited, and the influential yield on the 10-year Treasury moved down from about 4.12% before the close of the Fed meeting to about 3.80% by late Friday. While the entirety of the decline seems unlikely to hold, a fair bit of it should, and that will help mortgage rates to drop this week significantly. As they are already at better than five-month lows, this will likely garner some headlines and excitement... even as rates will still be in the mid-sixes for a conforming 30-year FRM. There's a light slate of fresh economic data out this week, so investors will have time to consider the current situation more deeply and thoroughly.
All this as a backdrop, we think there's a good likelihood of a 17-22 basis point or so decline in the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac Thursday, with average rates falling into the low-mid 6.5% range. If they make it below 6.6% -- and there's a good chance they will -- the headlines will read "lowest mortgage rates in almost 16 months."
