The "summer of speculation" is coming to an end of week when the Federal Reserve next meets. It's all but certain that the Fed will cut the federal funds rate, with the only unknown being the size of the cut. Given the Fed's typically cautious nature, a quarter-point trim is most likely, but there is at least some chance a 50-basis point cut could come.
Since mortgage rates have already declined appreciably -- the decline from this year's May peak has now already been more than a percentage point and 159 basis points from last fall's multi-decade peak levels -- there's probably not a lot of impact to be seen from just a quarter-point cut in the federal funds rate. A larger cut or aggressive expectations for cutting rates as laid out in the Summary of Economic Projections does however have the power to press mortgage rates lower still, as does any policy direction commentary from Fed Chair Powell at his post-meeting press conference.
This summer's decline hasn't featured much of that sort of compression. The 10-year Treasury yield has declined by 95 basis points since early May, while mortgage rates have managed to slide by 102 basis points over that same time frame. Unlike the 25 basis-point narrowing seen at the end of last year, spreads have only compressed by an additional 7 basis points and have been stable in a narrow band for all of 2024 so far. A long-run review of spreads suggests a "normal" differential between the two is something between 160 and 180 basis points, so spreads remain wider than normal, a place they have been since the Fed began running off its mortgage holdings, leaving only the private market to absorb new MBS supply.
It's at least worth considering that a drop in mortgage rates that results in a spike of originations would also increase supplies of MBS, and if there is no commensurate increase in investor demand for them, spreads could re-widen, meaning mortgage rates might be slower to decline, at least relative to yields on longer-term Treasuries.
The summer-long decline in mortgage rates -- at first gentle, then accelerating of late -- really hasn't sparked much of a burst of either home buying or refinancing, although both seem to have improved somewhat from dismal levels. The Mortgage Bankers Association reported that requests for mortgage credit rose by 1.4% in the week ending September 6, where a 1.8% increase in applications for funds to purchase homes was seen. The increase makes it five modest gains in the last six weeks, so the trend is at least mildly more favorable. Applications for refinancing existing loans won't really have much traction until rates head considerably lower but did manage a 0.9% increase in the latest survey week.
We'll see how markets react to the outcome of the meeting this week. As far as mortgage rates go, and as they are tracking Treasuries tightly of late, indications are that we'll see a modest decline of perhaps 4-6 basis points in the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac, but we've undershot the mark a bit lately.
