Since peaking back at the end of October, long-term fixed mortgage rates have been declining for weeks, landing at levels last seen in August. The decline for rates may have some additional space yet to run, thanks to a change in the outlook by the Federal Reserve.
As expected, the fed made no change to short-term interest rates but did signal that cuts may be coming. The meeting-closing statement regarding policy featured a subtle but significant change, moving from language that suggested firmer rates ahead to one that doubts the need for them. The phrase used throughout the Fed's hiking campaign of "In determining the extent of additional policy firming that may be appropriate" was changed to read "any additional policy firming that may be appropriate," (emphasis ours). At his post-meeting press conference, Fed Chair Powell said that the slight change in language came because while the Fed may be done increasing rates for this cycle, "participants also didn't want to take the possibility of further hikes off the table" should conditions warrant.
While it’s both hopeful and encouraging for potential borrowers that rates will likely be lower next year, it's also important to temper that enthusiasm. The reality is that a 4.6% median federal funds rate would return it only to about where it ended 2022 and began 2023. As such, this would still be as high as this rate was back in 2007, so only moving from about 22-year highs back down to "only" 16-year highs. Early in 2023 -- the last time we were at about the forecasted levels for federal funds -- 30-year mortgage rates were running in the low and middle sixes, so while the cost of mortgage money next year will likely be cheaper, it will still by no means be cheap.
The Fed likely changed its stance for two (if not more) reasons. First, and while still above desired levels, inflation has backed down appreciably, with core PCE at a running rate of 3.5% in the 12 months ended October; nearer-term trends (three and six-month reviews) are running well below that. This Fed-preferred measure of inflation peaked in September 2022 at a 5.2% rate, so annual price pressures have cooled already by about 33% and given the time lag for monetary policy changes to be fully realized, there is likely more drag on prices yet to be seen, so the decline in inflation seems likely to continue, although at some unknown rate of speed.
Both homebuyers and homeowners are getting the message that mortgage rates are falling and responding in kind. According to the Mortgage Bankers Association, overall requests for mortgage credit rose for a sixth consecutive week, posting a 7.4% rise in the week ending December 8. Applications for purchase-money mortgages rose by 3.5%, picking up again after a Thanksgiving-week stumble, while refinance activity powered higher by 19.4%, the biggest percentage bump seen here in some time. The Mortgage Bankers noted that a surge in government (FHA and VA) refinances powered the figure higher.
The Fed provided this week what investors have been hoping to see, improved prospects for lower rates in the coming year. Already rallying financial markets rallied further on Wednesday and Thursday but seemed to level out on Friday. Still, the decline in the influential yield on the 10-year Treasury legged down from its pre-meeting level of around 4.2% to as low as about 3.91% in intra-day trading on Thursday, and mostly hung around this bottom on Friday.
This sets the stage for what should be another meaningful decline in mortgage rates for this week. Already cracking below the 7% mark this week for the first time since early August, the average offered rate for a conforming 30-year FRM as tracked by Freddie Mac is now 84 basis points off its late October high, and the prospects seem good that this will turn into a full percentage point decline in rates or perhaps a bit more when updated data comes out next week. Something on the order of a 14-19 basis point decline in 30-year FRM rates feels about right.
This week, we'll also get a look at housing markets, ranging from builder sentiment to new construction and sales as well as existing home sales, plus we'll see updated PCE inflation data. The housing data will be reflective of demand when rates were at or near peak and heading into the typically slower season for sales, so don't expect to see any improvement there just yet.