Falling Mortgage Rates Offer Hope for Homebuyers and Refinancers Amid Market Upheaval
Recent financial market upheavals may lead to declining mortgage rates, presenting opportunities for new homebuyers and those looking to refinance existing high-rate loans.
United States, Bollywood Fever: The recent financial market turmoil may soon provide a silver lining for millions of U.S. households: falling mortgage rates. This potential drop offers a valuable opportunity for those eager to enter the expensive housing market and for others who borrowed at high rates to refinance.
While the exact pace of the decline is uncertain, some analysts anticipate a gradual reduction over the coming months. The drop in yields on U.S. government securities, which are crucial in determining home loan costs, suggests that mortgage interest rates will continue trending down from last week’s six-month low of approximately 6.70% for a 30-year fixed-rate mortgage, the most popular U.S. home loan.
This trend has already sparked increased interest. According to Google Trends data, internet searches for “refi” and “mortgage refinance” surged on Monday to the highest level in at least the last 90 days, doubling the number from July 28.
“The last couple of days have been very busy for us with several inquiries coming in and we expect that trend to continue,” said Alex Elezaj, chief strategy officer at United Wholesale Mortgage.
However, translating this interest into action may take some time. David Battany, executive vice president of capital markets at Guild Mortgage, noted, “People are definitely inquiring about where rates are and when it’s time to refinance. But so far, for most people, the rates haven’t dropped enough to make it worth their while to refinance.”
Currently, more than 4 million mortgages have interest rates of 6.5% or higher, according to Intercontinental Exchange’s ICE Mortgage Monitor. Yet, the majority of outstanding loans have rates below this threshold, indicating that rates need to fall further before refinancing becomes advantageous.
“It only makes sense to consider refinancing if mortgage rates drop two percentage points below your current mortgage,” said Patricia McCoy, a professor at Boston College Law School. “If somebody’s current mortgage is at 6%, it would probably only make sense to refinance if mortgage rates fall down to 4% or lower, and we’re a long way from that.”
Waiting on the Fed
The Federal Reserve is expected to start cutting interest rates soon, but how quickly this will positively impact the struggling housing market remains to be seen. Existing home sales fell for a fourth consecutive month in June, but economists anticipate the Fed’s pivot could foster a modest rebound later this year.
Home loan application volumes began to plummet in early 2022 as the Fed prepared to raise interest rates to combat severe inflation. Mortgage interest rates more than doubled between January and October 2022, reaching their highest levels in over two decades, surpassing 7% and eventually peaking around 8% last year.
Amid poor home affordability, applications for home purchase loans sank to their lowest in 30 years last October and remain near those levels today, according to the Mortgage Bankers Association (MBA). The rapid rise in interest rates, as the Fed increased its benchmark rate from near zero in March 2022 to its current range of 5.25%-to-5.50% by July 2023, also stifled loan refinance activity.
However, mortgage rates are now more than a full percentage point below their peak levels from late 2023, and the 10-year U.S. Treasury yield, which heavily influences home loan rates, has dropped by roughly half a percentage point since July 24.
While refinancing applications remain low by historical measures, they have recently crept up to a two-year high. MBA’s weekly data show they now account for nearly 40% of overall application volumes, up from around 30% a few months ago and among the highest during the Fed’s tightening cycle.
The number of outstanding high-interest rate mortgages continues to grow, suggesting that at least some borrowers could soon be in a position to refinance if rates continue to decline.
“It should be good for home buyers and home sellers because we will find a new equilibrium, and that will be a clearing price for more sales and even for more refis, but it’s exceedingly difficult to see us getting back to where we were before,” said Isaac Boltansky, managing director and director of policy research at BTIG. “We’re not going to see the lows that we saw during the COVID crisis anytime soon, if ever again.”
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