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Mortgage rates sink below 5 percent for the first time in four months

Fears of a recession have caused the 30-year fixed-rate average to reverse course

“Mortgage rates continue their bumpy ride amidst growing economic uncertainty,” Lisa Sturtevant, the chief economist for Bright MLS, wrote in an email. (washington post/TWP)

The 30-year fixed mortgage rate, the interest for the most popular home loan product, dropped below 5 percent for the first time in four months.

According to the latest data, released Thursday by Freddie Mac, the 30-year fixed-rate average tumbled to 4.99 percent with an average 0.8 point. (A point is a fee paid to a lender equal to 1 percent of the loan amount. It is in addition to the interest rate.) It was 5.3 percent a week ago and 2.77 percent a year earlier.

Freddie Mac, the federally chartered mortgage investor, aggregates rates from about 80 lenders across the country to come up with weekly national averages. The survey is based on home purchase mortgages. Rates for refinances may be different. It uses rates for high-quality borrowers with strong credit scores and large down payments. Because of the criteria, these rates are not available to every borrower.

The 15-year fixed-rate average fell to 4.26 percent with an average 0.6 point. It was 4.58 percent a week ago and 2.10 percent a year ago. The five-year adjustable rate average slipped to 4.25 percent with an average 0.3 point. It was 4.29 percent a week ago and 2.4 percent a year ago.

“Mortgage rates continue their bumpy ride amidst growing economic uncertainty,” Lisa Sturtevant, the chief economist for Bright MLS, wrote in an email.

Mortgage rates tend to follow the yield on the 10-year Treasury, the most-watched indicator of investor confidence. It sank after the Federal Reserve raised its benchmark rate by three-quarters of a percentage point last week, falling to 2.6 percent on Monday, its lowest level since early April. Since then, it has rebounded. The 10-year Treasury yield jumped to 2.75 percent Tuesday before slipping to 2.73 percent Wednesday.

“Several economic indicators pointed to slowing economic activity — GDP declined for the second quarter in a row, new-home sales slowed and consumer confidence dropped due to inflation and recession concerns,” said Paul Thomas, the vice president for capital markets at Zillow. “Investors reacted by driving longer-term rates — such as yields on 10-year Treasurys and mortgage-backed securities — lower, predicting the Fed will have to slow down rate hikes and potentially ease rates sooner than previously expected.”

The Fed has raised the federal funds rate four times this year in an attempt to curtail inflation, which has persisted at 40-year highs. Prices rose 9.1 percent in June, compared with prices the year before. Although the central bank doesn’t set mortgage rates, its actions have an effect on them. Since January, home loan rates have gone up more than 2.5 percentage points.

However, even before the Bureau of Economic Analysis released the latest GDP reading, worries about an impending recession sent mortgage rates lower. After peaking at 5.81 percent in June, the 30-year fixed average has tumbled 82 basis points. (A basis point is 0.01 percentage point.)

The push-pull between fears about a recession and concerns about inflation is what is causing volatility in mortgage rates. When investors are worried about inflation, they stop buying bonds because the return on their investment is less when inflation is high. Inflation erodes the value of a bond’s future payments. Less demand causes bond prices to drop and yields to rise. Because mortgage rates often follow the same path as the 10-year Treasury yield, they also go up.

But in a recession, bonds are seen as a safe investment. More demand for bonds causes prices to rise and yields to fall, which usually sends mortgage rates down.

“Downbeat economic news has been pressing mortgage rates lower in the past few weeks,” said Holden Lewis, a home and mortgage expert at NerdWallet. “This has happened despite the persistence of high inflation, a factor that tends to lift interest rates higher. Bond investors have been oscillating between optimism about the inflation outlook, when they send mortgage rates lower, and pessimism, when they let rates rise. The last week has been marked by a trough in rates amid chatter about a possible recession. But already, mortgage rates are bouncing upward; even as it’s not yet showing up in the weekly rate average.”

Calculate how much more mortgages will cost as interest rates rise

Bankrate.com, which puts out a weekly mortgage rate trend index, found the experts mixed on where rates are headed in the coming week. Forty percent say they will go up, 30 percent say they will go down and 30 percent say they will remain about the same.

HousingWire analyst Logan Mohtashami expects rates to rise.

“After a major move lower in rates, the Federal Reserve members went on full force to try to talk about higher rates and getting conditions tighter,” Mohtashami said. “The last thing they want to see is lower mortgage rates and stocks rising.”

Meanwhile, James Sahnger, a mortgage planner at C2 Financial, predicts they will hold steady.

“Expect continued day-to-day volatility,” Sahnger said. “In the last two months, we have seen huge swings in rates and mixed discussions on inflation, recession and jobs. I don’t expect Friday’s employment report to provide additional clarity, but rates will likely be in the same ballpark.”

Meanwhile, lower rates are causing an uptick in mortgage applications. Demand improved last week for the first time in a month. The market composite index — a measure of total loan application volume — increased 1.2 percent from a week earlier, according to Mortgage Bankers Association data.

The refinance index rose 2 percent from the previous week but was 82 percent lower than a year earlier. The purchase index was up 1 percent. The refinance share of mortgage activity accounted for 30.8 percent of applications.

“Refinance application activity rebounded last week,” Fannie Mae chief economist Doug Duncan wrote in an email. “Mortgage rates have inched downward since the second half of June, though they remain significantly higher than they were at the start of the year. As a result, while refinance activity increased at its highest weekly rate so far this year (excluding holiday-impacted weeks), the overall level remains significantly lower than 2020 and 2021 levels.”

Unlike refinances, purchase applications were essentially flat.

“Lower rates have not pulled people back into the housing market in any significant numbers,” Sturtevant wrote. “Despite the dip in mortgage rates, data on new purchase contract activity indicate that many buyers are remaining on the sidelines. Mortgage applications have inched up slightly. But other data, including data on showings and public views of properties, indicate that buyer activity remains restrained, despite the lower movement on rates.”

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