Everyone is eagerly awaiting lower mortgage rates. Some may have marked their calendars for the upcoming rate cut in September. For borrowers, it will be a much-needed relief after the Federal Reserve has been battling runaway inflation for two years. But the rate cut won't immediately translate into lower mortgage rates, according to one industry watcher.
“The bond market has already priced in a rate cut, so a simple Fed action of cutting rates won't necessarily have a direct impact on mortgage rates,” Alan Ratner, managing director at housing research firm Zelman & Associates, said in an interview with CNBC yesterday. “Right now, the bond market has already priced in that expectation, so it remains to be seen how far rates actually go, but our view is that it's going to be a fairly gradual decline over the next few years, rather than a gradual decline.”
The company's CEO, Ivy Zelman, nicknamed “Poison Ivy” for predicting the 2008 housing bubble burst, like her colleagues she has a less-than-optimistic view of the housing industry, and particularly sales. Last fall, she said, “existing home sales… are probably at their lowest level since 2000.” [great financial crisis,]” and predicted that it would remain at “extremely depressed levels” through 2025. May was still weak, down 0.7% from the previous month and 2.8% from a year earlier, and data due next week will tell us whether June was different.
But inventory is improving, a sign that the lock-in effect that has kept sellers on the sidelines is easing: Redfin recently reported that total listings are nearing a nearly four-year high of 977,230.
And, of course, mortgage rates are falling. The average daily rate for a 30-year fixed mortgage is 6.81%, and the weekly rate is 6.77%. The decline in rates is mostly due to weak inflation reports, but that's not the only reason. Rates won't continue to fall. “But what the market is signaling right now is optimism that the calming inflation numbers will lead to significantly lower mortgage rates later this year, which will solve some of the homebuying challenges,” says Ratner. “That may be a bit optimistic.”
If so, that's not good for homebuyers, who are dealing with home prices and mortgage rates that are significantly higher than they were before the pandemic, and incomes that aren't necessarily keeping up. So even though people need housing, demand is sluggish.
“We're concerned about the economy and the consumer,” Rattner said. “Right now, if we can get a soft landing and a low interest rate environment, that would be the ideal scenario for the housing market, but it's certainly a challenge.” Lower mortgage rates won't mean much if the economy slows or goes into recession, he said.
Still, we're not far from what Compass CEO Robert Refkin called the “magic mortgage rate.” He suggested that rates below 6% would bring homebuyers back into the market. Lawrence Yun, chief economist for the National Association of Realtors, also recently said 6% will become the “new normal.” Yun doesn't expect mortgage rates to fall to 5% even if the Fed cuts rates, much less approach the all-time lows they hit during the pandemic.
In a rare bit of good news, mortgage rates are at their lowest in months, bringing mortgage payments down from record highs earlier this month and giving some buyers thousands of dollars in purchasing power. Whether that trend will continue remains to be seen.
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