The 30-year fixed mortgage rate fell to 7.02% in the week of May 16. Rates fell as the 10-year Treasury note fell climbed down to 4.39% as of about noon today from 4.47 % on May 10 (and peak of 4.72% on April 25). The decline in mortgage rates should lift up homebuying confidence and market transactions, bolstered by the seasonal summer upswing. I expect rates to continue to edge down through September and hover at the 6.8%-7.1% range.
Rates fell as several data showed inflation easing and the economy continuing to slow down. However, indicators were mixed which show that while inflation will generally trend down, there could be some short-term upticks that will feed into interest rate movements.
- April CPI inflation slowed to a monthly pace of 0.3% (after 0.4% in Feb-March).
- However, the Producer Price Index rose at a monthly pace of 0.5% in April and y/y growth rose to 2.2% as of April. The import price growth accelerated to an y/y pace of 1.1% in April from 0.4% in March.
- Consumer spending is slowing. Advance retail sales were flat in April from the prior month, a slower pace since the 0.7% m/m pace in February. On a y/y basis, advance retail sales rose 3%, which is below the rate of inflation, so negative change in real terms.
- Consumers are maxed out, spending most of their income, and reducing their savings (income less spending). The personal savings rate fell to 3.2% in March from 5.2% one year ago and 7.9% in March 2019 (pre-pandemic).
- The unemployment rate slightly ticked up to 3.9% in April (3.8% in March)
- Job openings continued to fall, to 8.488 million as of end of March 2024, compared to 9.6 million one year ago.
- Industries are operating at a lower capacity, at 78.4% as of April from 79.8% one year ago. However, manufacturers saw an increase in orders in February (+1.4% m/m) and March (0.8% m/m), though one can read the March data as a slowdown.
- But the biggest hit has been on housing construction. Builders outlook has sagged amid higher borrowing costs. Building permits has fallen to a seasonally adjusted annual rate of 1.44 million in April, after rising to 1.56 million February.
Bottomline : while indicators are mixed, the overall picture is one where inflation and the economy is slowing, as the series of 11 rate hikes were supposed to do. So expect rates to continue to edge down through September and hover at the 6.8%-7.1% range.
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7moThat's a significant drop. It's good news for potential homebuyers. Do you think this trend will continue in the coming months?
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7moThe mortgage spread has tightened by ~12 bps since NFP which is the reason current average rates are 6.99% today rather than what could have been 7.1% to 7.15%. This usually happens when sentiment, however brief, becomes bullish in the bond market and MBS investors bid up current coupon/TBA pools, lowering the yield, translating into lower conventional mortgage rates. My thoughts on the downside of rates align with yours. However, my upper boundary is ~7.55% due to recurring inflation potentially driving the UST10 yield again through next resistance at ~4.5% to 4.6%, then potentially to 4.7% to 4.8% resistance. This would deliver that approximate average mortgage rate, allowing for some widening of the mortgage spread.