Mortgage rates fall under 7.5% as a Fed pause looms

Article Summary

Consumers and housing professionals may soon get a bit of relief if the Federal Reserve pauses its rate-hiking campaign. After lifting the benchmark rate by 25 basis points in September, members of the Federal Open Market Committee are widely expected to leave rates unchanged at an upcoming meeting.

CME Group’s FedWatch tool indicated that 90.6% of rate traders were expecting no move, up from 84.5% a week earlier and 35.8% a month earlier. That shift in expectations has followed a softer jobs report from the U.S. Bureau of Labor Statistics, even as Consumer Price Index data showed inflation running hotter at 3.7% annually.

“The Fed may deliver a Halloween treat this week with a rate pause, but there could still be a trick in store. Rising inflation expectations could prompt another hike or a signal that more rate hikes are coming, keeping mortgage rates elevated and leaving homebuyers waiting longer for relief,” Sam Williamson, senior economist at First American, said in a statement.

“Whether the Fed hikes or holds this month, homebuyers shouldn’t expect a big change in mortgage rates,” he added. “With another hike widely expected in December and further increases possible next year, borrowing costs are likely to remain elevated, keeping many buyers and sellers on the sidelines. But not everyone has the luxury of waiting. New jobs, growing families and other life events will keep some buyers moving forward, even as higher rates delay moves that can wait.”

Even if the Fed holds, policy is moving elsewhere

Home sales and mortgage originations have been squeezed by higher borrowing costs and other affordability pressures, and industry forecasts suggest conditions could remain difficult into the future.

The Trump administration also moved on housing policy through an executive order aimed at four specific areas of mortgage and housing costs.

The Federal Housing Finance Agency has been instructed to develop a pilot program that would automatically cancel mortgage insurance premiums on conventional loans backed by Fannie Mae and Freddie Mac once they fall below certain loan-to-value thresholds. Unlike an earlier draft, however, the final order signed by President Donald Trump applies only to mortgages made after the pilot program is established rather than retroactively.

“Most of this is a long play. People will see the benefit of the mortgage insurance piece years from now,” said Jason Madiedo, CEO of Las Vegas-based mortgage lender SimplyPMG. “Today, property values are under pressure, and that’s the more immediate problem.”

The order also creates a task force on manufactured housing innovation to improve quality and reduce the cost of factory-built homes. In addition, it turns the FHFA title insurance waiver pilot into a permanent program for certain refinances and directs the U.S. Department of Agriculture and Department of Veterans Affairs to lower rates on single-family home loans.

“The title insurance piece is real, but it’s aimed at the wrong part of the problem,” Madiedo said. “Nobody refinances to save $800 on title. People refinance for one of two reasons: to lower a payment, which is rate-driven, or to pull cash out. Eight hundred dollars doesn’t change either calculation.

“If the goal was to move the needle on refinancing, the lever was the loan-level price adjustment on cash-out, which FHFA also sets. Removing that would have made a far bigger difference than the closing cost.”

‘Massive conundrum’ for monetary policy

Melissa Cohn, regional vice president of William Raveis Mortgage, described current housing conditions in blunt terms. She said the Fed is highly likely to hold steady because policymakers are facing a “massive conundrum” as they weigh higher oil prices against softer economic data.

“I think that if oil prices continue to soar, then the Fed should be raising rates in December,” Cohn said. “The housing market is imploding. Mortgage rates are at a point where people just can’t afford to buy, and new-home sales activity is diminishing each week.

“You keep reading about how the real estate market’s going into a deep freeze. The prices haven’t dropped enough to compensate for the higher interest rates; mortgage rates are higher than they were earlier this year, and it’s impacting affordability.”

As the year winds down and lenders look for new business in the next year, companies are likely to benefit more from preparing for several possible outcomes than from trying to predict exactly what comes next, according to Tanya Bates, Oklahoma-based regional director of home loans at BOK Financial.

“The biggest surprise was how quickly the expected recovery disappeared once inflation and long-term rates moved against the consumer. This was a reminder that demand does not automatically become closed transactions when the monthly payment no longer works,” Bates said.

“Going forward, I would watch inflation and the 10-year Treasury before I watch the next Fed headline. We need inflation relief that is durable enough to bring down long-term borrowing costs with a major deterioration in household employment,” she added. “... The affordability conversation cannot stop at the mortgage rate. Taxes, insurance, maintenance and homeowners’ association costs increasingly determine whether a payment remains sustainable after closing.”