The Fed meeting passed and the first cut of the new rate cycle behind them. Investors and financial markets have turned their eyes toward the incoming data to see if any surprises may show. At least for this week, the answer is "no".
With mortgage rates down appreciably since 2024 peaks, it's thought that home sales should start to perk up a bit, provided that the typical seasonal fall-off in demand and sales has less pull this year. Sales of new homes declined by 4.6% in August compared to July, but July's pace was the strongest in more than two years, so the monthly decline left sales of new homes at a solid 716,000 annualized pace. August's easing of sales lifted the supply ratio back up to 7.8 months of available stock at the present sales rate, while prices of new homes eased by $8,400 to $420,600 last month -- a figure 4.6% lower than the same period back in 2023. Builders continue to use price-cutting and other incentives to help move homes, something you're unlikely to see in the existing home market anytime soon.
That's the case even though sales of existing homes are still slow. The National Association of Realtors Pending Home Sales Index -- a measure of signed contracts to buy a home -- managed to lift itself barely off the floor in August, rising by 0.6% from its all-time low in July. Mortgage rates were falling during the August and inventory levels of homes to buy are improving, but there's still relatively little available for potential buyers to consider and what is available is still commanding top-shelf prices (any seasonal softening notwithstanding). Existing home sales for August came in at a 3.86 million annualized level, and a barely improved PHSI for August doesn't point to any kind of measurable pickup for sales come September or even into October, for that matter. The benefit of lower rates now may not show until October-November sales, and after that, seasonal effects that damp activity start to kick in.
The recent declines in mortgage rates haven't gone unnoticed by potential homebuyers, but perhaps more so by homeowners. The Mortgage Bankers Association reported that there was an 11% increase in the number of requests for mortgage credit in the week of September 20, making it five weeks in a row of gains (and 7 of the last 8). Purchase-money mortgage applications edged 1.4% higher, but this modest increase is also part of a 7-of-8-week string featuring an increase. Refinancing activity has popped higher more considerably; last week's 20.3% increase came on top of a 24.2% rise the week prior, so a fair bit of pent-up homeowner demand is starting to be expressed into the market. How many folks can profitably refinance with rates hanging around the 6% level isn't exactly clear, but it doesn't appear that the pool of potential candidates has yet been exhausted.
After the Fed meeting, the influential yield on the 10-year Treasury has generally been higher, moving from about 3.62% prior to the Fed meeting to as high as 3.80% (3.76% late Friday). A rising yield typically translates into somewhat firmer mortgage rates, but they really haven't moved at all, and in fact, Freddie Mac actually reported a one-basis point decline in the average offered 30-year FRM rate they track. So why haven't mortgage rates moved?
What's happened is that there has been a measurable contraction in spreads over the last week or so. The difference between the yield on 10-year Treasuries and retail mortgage rates had been holding around the 250-260 basis point level for months, but broke lower to 240 basis points a few weeks ago and seem to have collapsed further to about 231 last week, the narrowest this spread has been in more than two years. With the Fed cutting rates and more cuts expected, it may be that investors searching for better yields have rediscovered some appetite for mortgages. How durable this may prove isn't yet clear, and we'll need to see if this is more of an end-of-quarter move by investors (which is sometimes the case) or something with greater durability.
Although mortgage rates should probably be a bit higher than they are now, they aren't, and don't appear to be poised to go anywhere very fast in the coming days, either. This week's labor reports, and ISM releases do have the power to influence them up or down, but provided these come in about as expected, the chances of large moves are diminished. September's employment situation report comes out too late to influence this week's mortgage rates, regardless.
