Mortgage rates headed under 7% on encouraging inflation data

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Mortgage rates retreated from 2024 highs for the third week in a row and were headed below 7 percent after Wednesday’s release of two reports showing the economy cooled in April, potentially giving Federal Reserve policymakers an incentive to cut rates sooner rather than later.

A key inflation gauge, the Consumer Price Index (CPI), showed prices for a broad range of goods were up 3.4 percent in April from a year ago, down from 3.5 percent in March. It was the first downward move in annual price growth since January.

Core CPI, which excludes volatile food and energy prices and can be a better predictor of inflation trends, was up 3.6 percent in April from a year ago, an improvement from 3.8 percent annual growth in March.

A separate Census Bureau report released Wednesday showed retail and food services sales were slower than expected in April.

“The smallest increase in the core CPI since December will reassure the Fed that monetary policy is tight enough to bring inflation eventually back to the 2 percent target, though the run rate still needs to slow further to trigger rate cuts, unless payrolls tank first,” Pantheon Macroeconomics Chief Economist Ian Shepherdson said in a note to clients.

Futures markets tracked by the CME FedWatch tool on Wednesday put the odds of one or more Fed rate cuts by Sep. 18 at 73 percent, up from 65 percent on Tuesday.

Yields on 10-year Treasurys, a barometer for mortgage rates, dropped 10 basis points after the data releases and are now down nearly 40 basis points from a 2024 high of 4.74 percent registered April 25.

Mortgage rates retreat from 2024 highs

Data tracked by Optimal Blue lags by a day but shows that even before Wednesday’s news rates on 30-year fixed-rate mortgages had dropped to an average rate of 7.00 percent Tuesday — down 27 basis points from the 2024 high of 7.27 percent recorded on April 25.

A same-day index compiled by Mortgage News Daily (MND) showed rates on 30-year fixed-rate mortgages dropping 12 basis points Wednesday, to 6.99 percent.

If Optimal Blue’s survey shows a similar drop when data is released Thursday, that would mean homebuyers were able to lock contracted rates on 30-year fixed-rate loans at below 6.9 percent on Wednesday.

The rates reported by MND are higher than Optimal Blue’s because the MND index is adjusted to estimate the effective rate borrowers are offered, regardless of what points they’re willing to pay. Optimal Blue uses contracted rates provided for rate locks, even if borrowers have paid points to get a lower rate.

With inventories in many markets still scarce, homebuyers have yet to come out in force in response to lower rates.

After picking up by 2 percent during the week ending May 3, applications for purchase loans fell by a seasonally adjusted 2 percent last week compared to the week before, according to a weekly survey by the Mortgage Bankers Association.

Last week’s decline in rates “led to a small boost to refinance applications, including another strong week for VA refinances,” MBA Deputy Chief Economist Joel Kan said, in a statement.

The drop in purchase loan applications was driven largely by a 9 percent drop in FHA purchase applications, Kan said, compared to a 1 percent drop in applications for conventional loans eligible for purchase by Fannie Mae and Freddie Mac.

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Joel Kan

“While the downward move in rates benefits prospective homebuyers, mortgage rates are still much higher than they were a year ago, while for-sale inventory remains tight,” Kan said.

Compared to a year ago, purchase loan applications were down 14 percent, while requests to refinance were up 7 percent.

Inventories are less of an issue for new-home buyers, and even as rates climbed in April, mortgage applications for new home purchases were up 22.1 percent from a year ago, a separate MBA survey showed.

Based on loan applications submitted to homebuilders’ mortgage subsidiaries, the MBA estimates that new homes were selling at a seasonally adjusted annual rate of 699,000 units in April, up nearly 14 percent from March.

“There continues to be healthy demand for new homes, given greater availability and other benefits over existing home purchases such as builder concessions and customization options,” Kan said. “First-time homebuyers account for a growing share of purchase applications with the FHA share of applications at 26.3 percent in April.”

Inflation moderated in April

Last year inflation, particularly core CPI, was consistently trending down, raising hopes that the Fed might cut interest rates in time for the spring homebuying season.

But a string of hot inflation reports in March and April sent mortgage rates rebounding to new 2024 highs — sparking speculation that the Fed might not only keep rates higher for longer but, eventually, be forced to raise rates to bring inflation under control.

However, Fed policymakers have always said that it would take time for the 11 rate increases implemented from March 2022 through July 2023 to have an effect on the economy. Those rate hikes brought the short-term federal funds rate to a target of between 5.25 percent and 5.5 percent — the highest level since 2001.

At their May 1 meeting, Fed officials took a subtle step toward easing by dialing back the pace of “quantitative tightening” — an unwinding of the central bank’s $7 trillion balance sheet — to $40 billion a month, less than half the pace envisioned two years ago.

Two days later, with mortgage rates already retreating from 2024 highs, a surprisingly soft April jobs report from the Labor Department accelerated the pullback in rates, as bond market investors who fund most mortgages reassessed the likelihood of Fed rate cuts.

The latest CPI report is additional evidence that the economy is cooling, and inflation is trending down.

Ian Shepherdson

Ian Shepherdson

“Looking ahead, the case for expecting a further slowdown in core CPI inflation remains compelling,” Shepherdson said. “Supply chains have normalized, wage growth is weakening, and corporate margins are flat but still hugely elevated, indicating clear scope to fall ahead. At the same time, global food and energy prices remain unthreatening, and rent inflation for new tenants remains subdued.”

Shepherdson thinks the foundations are in place for further deceleration in core CPI this summer, allowing the Fed to start easing in September — or as early as July, if job growth continues to decelerate as quickly as implied by National Federation of Independent Business (NFIB) surveys.

But Nigel Green, CEO of Dubai-based deVere Group, issued a more hawkish view, warning that investors are “indulging in wishful thinking on Fed rate cuts” this year.

Nigel Green

Nigel Green

“Super cautious Fed officials will need to see several consecutive months of evidence showing inflation — which is proving far stickier than had been hoped — is really heading back to the 2 percent target before they consider a pivot on monetary policy,” Green said in a statement. “As such, we still expect there’s a considerable risk that they will not feel comfortable about cutting rates before 2025.”

The Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, is closer to reaching the Fed’s 2 percent inflation target than CPI, registering 2.7 percent in March.

While the March PCE print was up from 2.5 percent in February, the next PCE data release on May 31 could provide more downward momentum for mortgage rates — or send them rebounding again.

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