U.S Mortgage Rates – Slide Back as the Markets Price in a FED Rate Cut

Mortgage rates were back on the slide in the week ending 25^th July. Reversing a 6 basis point fall in the week ending 18^th July, 30-year fixed rates fell by 6 basis points to 3.75%.

The pullback left 30-year rates close to the lowest level since late 2016 according to figures released by Freddie Mac.

Compared to this time last year, 30-year fixed rates were down by 79 basis points.

More significantly, 30-year fixed rates are down by 119 basis points since last November’s most recent peak of 4.94%.

Freddie Mac noted that purchase application demand has risen steadily over the last 2-months to the highest year-on-year change since 2017. Purchase applications have continued to find support from mortgage rates that have hovered close to 3-year lows.

Economic Data from the Week

Key stats out of the U.S through the 1^st half of the week were on the heavier side.

June existing-home sales and new home sales had a muted impact on U.S Treasury yields on the week. Of greater significance was a pickup in service sector activity. Stagnation in the U.S manufacturing sector somewhat muted the impact of the pickup in service sector activity.

According to prelim July Markit PMI numbers, service sector PMI rose from 51.5 to 52.2. The manufacturing sector PMI, however, fell from 50.60 to 50.0, leaving the composite up by just 0.1 point to 50.6.

While the pickup in service sector activity was key, market sentiment towards the economic outlook and monetary policy remained the key driver.

The markets have priced in a July rate cut by the FED next week that pinned back mortgage rates in the week.

Freddie Mac Rates

The weekly average rates for new mortgages as of 25^th July were quoted by Freddie Mac to be:

• 30-year fixed rates decreased by 6 basis points to 3.75% in the week. Rates were down from 4.54% from a year ago. The average fee slipped from 0.6 to 0.5 points.

• 15-year fixed rates fell by 5 basis points to 3.18% in the week. Rates were down from 4.02% from a year ago. The average fee held steady at 0.5 points.

• 5-year fixed rates slipped by 1 basis point to 3.47% in the week. Rates were down by 40 basis points from last year’s 3.87%. The average fee held steady at 0.4 points.

Mortgage Bankers’ Association Rates

For the week ending 19^th July, rates were quoted to be:

• Average interest rates for 30-year fixed, backed by the FHA, decreased from 4.01% to 3.98%. Points increased from 0.28 to 0.31 (incl. origination fee) for 80% LTV loans.
• Average interest rates for 30-year fixed with conforming loan balances decreased from 4.12% to 4.08%. Points decreased from 0.38 to 0.33 (incl. origination fee) for 80% LTV loans.
• Average 30-year rates for jumbo loan balances decreased from 4.07% to 4.04%. Points increased from 0.21 to 0.25 (incl. origination fee) for 80% LTV loans.

Weekly figures released by the Mortgage Bankers Association showed that the Market Composite Index, which is a measure of mortgage loan application volume, decreased by 1.9% in the week ending 19^th July. The fall followed on from a 1.1% decline in the week ending 12^th July.

The Refinance Index decreased by 2% in the week ending 19^th July, reversing a 2% rise in the week ending 12^th July.

The share of refinance mortgage activity decreased from 50.0% to 49.8%, partially reversing a rise from 48.7% to 50.0% in the week prior.

According to the MBA, mortgage activity was lower in spite of rates falling across the board in the week. Refinance activity was also lower, though government refinance applications were on the rise, supported by a 12% jump in FHA applications.

The MBA also noted that mortgage rates are comparable to the average rate of 4.10% in June, while refinances last week were 7% lower than the previous month. The numbers suggest that the market sees rates lower for longer, with borrowers needing a bigger fall to consider refinancing.

For the week ahead

It’s a busy first half of the week ahead.

The FED’s preferred June Core PCE Price Index figures are due out on Tuesday. June personal spending and July consumer confidence figures will also influence yields early on in the week.

The focus will then shift to July’s ADP nonfarm employment change numbers due out on Wednesday.

Of greater influence on the week, however, will be the FED’s interest rate decision and FOMC statement.

The markets have priced in a 25 basis point rate cut. The FED will need to deliver along with a dovish statement to pin mortgage rates back.

Outside of the numbers

Earnings season will continue to, not only influence market risk appetite, but also sentiment towards this week’s FED,

On the geopolitical front, the U.S – China trade talks resume at the start of the week, which will also have an impact on yields. There’s also tension in the Middle East to consider…