The economic data continue to point to a modest-to-moderate pace of growth, so all that's needed to start the walk down the path to a September rate cut by the Fed are some additional measured strides toward the Fed's inflation goal. Even though it wasn't in the form of the central bank's preferred price gauge, another small step in that direction was taken last week, when the Consumer Price Index report for June was released.
No additional moderation in applications for mortgage credit would be welcome, though. In the week ending July 5, request for funds to buy homes or refinance mortgages eased by 0.2%, according to the Mortgage Bankers Association. Purchase-money requests picked up by 1% but were offset by a 2.2% drop in those for refinancing purposes. Whether existing or new, home sales have been quite soft, with the normally busy spring homebuying season rather muted this year due to high mortgage rates, high home prices and limited existing-market inventory of homes to buy curtailing sales considerably.
For components of the economy highly dependent on lower rates, a Fed move cannot come soon enough. Even when it does, a quarter-point decline in the federal funds rate still only erases one-twentieth of the 500 basis-point increase in them seen between March 2022 and July 2023, so the needle won't be moving all that much. Just as increases and decreases in economic growth and inflation have come in steps since that time, we will need to see a series of steps by the Fed to lower short-term rates before there is a meaningful cumulative impact on mortgage rates.
Optimism, hope, and enthusiasm are one thing; reality is another. The optimism and hope is that lower rates will soon be coming, and there's plenty of enthusiasm for that. However, the reality is that market interest rates and mortgage rates remain high and will for some time yet. However, even small steps in the right direction are helpful, and we're likely to see one this week in mortgage rates. Based on how bond markets reacted last week, we think that there will be another 6-8 basis point decline in the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac, which would put this figure at a little better than a three-month low.
