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Mortgage rates appear to have room to continue falling in July after closely watched inflation indicators showed the economy continued to cool in May.
The U.S. Department of Commerce’s Bureau of Economic Analysis reported on Friday that the Federal Reserve’s preferred inflation indicator, the personal consumption expenditures (PCE) price index, fell to 2.56% in May.
This is the second month in a row that annual inflation has been close to the Fed’s 2% target, raising the possibility that the central bank will begin lowering short-term interest rates as early as September.
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Core PCE, which excludes food and energy costs and is a more reliable indicator of underlying inflation trends, fell to 2.57% in May, the lowest reading since March 2021. percentage target.
Ian Shepherdson
“Looking ahead, we believe a sustained and broad-based reacceleration in the core PCE deflator is unlikely after slowing in April and May,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note to clients. “The labor force “Weakness in the market is growing, putting increasing pressure on wage growth, commodity prices are broadly flat, supply chains remain fluid, margins are under increasing pressure and newly agreed rents are slowly rising.”
While Pantheon economists expect core personal consumption spending to pick up slightly in May-June, they expect a “sustainable multi-month” deceleration in inflation thereafter.
“If we are right, the Fed should be confident enough at its September meeting that core PCE inflation will continue to rise back to 2% to begin easing,” Shepherdson said.
Futures markets tracked by the Chicago Mercantile Exchange’s FedWatch tool on Friday showed a 64% chance that the Fed would cut interest rates at least once in September, up from 46% on May 28.
PCE and core PCE trend downward
After reaching a peak of 7.12% in June 2022, the Federal Reserve gradually raised interest rates to control inflation to 2.48% in January. But the PCE price index showed inflation worsened in February and March, causing mortgage rates to rebound as hopes of multiple rate cuts by the Federal Reserve in 2024 dim.
The latest declines in PCE and core PCE were in line with expectations, as previously released data on which these indices, including the Consumer Price Index (CPI) and Producer Price Index (PPI), also showed an easing in inflation in May.
Investors in the bond market, which funds most mortgages, initially snapped up the 10-year note after May PCE data was released at 8:30 a.m. EDT on Friday, sending yields as low as 4.26%. But the 10-year Treasury yield, a barometer of mortgage rates, quickly climbed back above Thursday’s closing price of 4.29%.
Daily loan lock-in data tracked by Optimal Blue, lagged one day, showed 30-year high fixed-rate mortgage rates averaging 6.88% on Thursday, down 39 basis points from the 2024 high of 7.27% recorded on April 25. 1 basis point – one hundredth of a percentage point.
Rates on 30-year fixed-rate loans climbed 2 basis points on Friday to 7.07%, according to an index maintained by Mortgage News Daily (MND). MND reports higher interest rates because they are adjusted to estimate the effective interest rate a borrower would receive even if they did not pay points. Optimal Blue tracks contract rates, including those locked in by borrowers who pay points to get a lower rate.
Mortgage rates depend largely on investor demand for mortgage-backed securities, and investors are nervous about the prospect of the Fed continuing its “higher for longer” rate strategy. Federal Reserve policymakers said at their June 12 meeting that they would be cautious about cutting interest rates until they were sure inflation would not surge again.
Speaking to bankers at a meeting on Thursday, Fed Governor Michelle Bowman attributed much of last year’s progress on inflation to “the easing of supply chain constraints, the availability of workers partly due to immigration.” Increased volumes and falling energy prices”.
Michelle Bowman
Bowman said these factors were “unlikely” to lower inflation further in the future. Supply chains “have largely normalized, labor force participation rates have stabilized below pre-pandemic levels in recent months, and U.S. immigration policies that have been liberalized over the past few years, adding millions of new immigrants, are likely to become more restrictive.”
Other “upside risks” to worsening inflation include potential spillovers from regional conflicts, which could disrupt global supply chains and send food, energy and commodity prices soaring.
“There is also a risk that the easing of financial conditions since late last year, reflecting the sharp rise in equity valuations, and additional fiscal stimulus could increase demand dynamics, hinder any further progress, or even lead to a collapse in inflation,” Bowman said. The expansion speeds up again.
Bowman, rated by Reuters as the most hawkish Fed policymaker for her hawkish stance on inflation, reiterated her willingness to raise interest rates if needed – a position she had previously stated in October and May.
“While the current stance of monetary policy appears to be at a restrictive level, I remain willing to raise the target range for the federal funds rate at future meetings if incoming data indicate that inflation progress has stalled or reversed,” Bowman said. Four.
Mortgage rates expected to continue falling
Source: Fannie Mae Housing Forecast, June 2024; MBA Mortgage Finance Forecast, June 2024.
But recent declines in mortgage rates from their 2024 highs have reignited homebuyer interest, and housing industry economists believe there is more room for rates to fall this year and next.
Homebuyer demand for purchase loans rose for a third straight week in the week ended June 21 after mortgage rates hit their lowest levels in months, according to the Mortgage Bankers Association (MBA) weekly survey of lenders. rise.
MBA economists said in a June 24 forecast that they expect 30-year fixed-rate loan rates to fall to 6.6% in the fourth quarter of 2024 and to an average of 6.0% in the fourth quarter of 2025.
Fannie Mae economists said on June 10 that they expect 30-year fixed-rate loans to fall to 6.7% in the fourth quarter of 2024 and to 6.3% by the end of next year.
Fannie Mae forecasters say more listings and lower mortgage rates will increase home sales by 9.3% in 2025, to 5.3 million transactions.
But analysts at Bank of America Global Research believe home sales may not begin until 2026 if home prices continue to rise and inventory continues to be constrained by the “lock-in effect” experienced by homeowners who refinanced when interest rates were at historic lows. Will rebound.
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