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Homebuyer demand for purchase rates picked up last week for the second week in a row, as mortgage rates dropped to the lowest levels since March. But rates for conforming mortgages are once again inching back toward 7 percent this week as investors weigh the odds of Fed rate cuts later this year.
Applications for purchase loans were up by a seasonally adjusted 2 percent last week compared to the week before, according to a weekly survey of lenders by the Mortgage Bankers Association. While it was the second consecutive week-over-week increase in demand for purchase mortgages, applications were still down 12 percent from a year ago.
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Refinancing applications during the week ending June 14 were essentially flat from the week before, but up 30 percent from a year ago.
Mike Fratantoni
“Mortgage rates dropped last week following the latest inflation data and the [Federal Reserve] meeting, with the 30-year conforming rate dropping to 6.94 percent and reaching its lowest level since the end of March,” MBA Chief Economist Mike Fratantoni said in a statement Wednesday.
Federal Reserve policymakers held rates steady at their June 12 meeting, saying they wanted more evidence that inflation is subsiding before cutting interest rates.
But the Fed only has direct control over short-term rates. Bond market investors who fund most mortgages brought long-term rates down sharply last week after seeing the latest Consumer Price Index reading, which showed inflation eased in May.
Mortgage rates came down again the next day on reports showing May jobless claims jumped to their highest level since August 2023 and that wholesale prices unexpectedly dropped in May brought long-term rates down again.
Rates on 30-year fixed-rate conforming loans dropped to 6.81 percent on June 13, down nearly half a percentage point from a 2024 high of 7.27 percent registered April 25, according to rate lock data tracked by Optimal Blue.
Mortgage rates bounce
But mortgage rates have been on the rebound this week as a number of Fed policymakers — including the presidents of the Federal Reserve banks of New York, Boston, Dallas and St. Louis — continue to stress that the Fed is looking for more data confirming that inflation is headed toward their 2 percent target before cutting rates, Reuters reported.
Optimal Blue data shows that after climbing for three days in a row, rates on 30-year fixed rate loans were averaging 6.88 percent Tuesday.
An index maintained by Mortgage News Daily showed rates for 30-year fixed-rate loans had climbed back above 7 percent Monday but flattened out since then.
(Rates reported by Mortgage News Daily are higher because they are adjusted to estimate the effective rate borrowers are offered, regardless of what points they’re willing to pay. Optimal Blue tracks contracted rates, including those locked in by borrowers who paid points to get a lower rate.)
The next big move in mortgage rates could be triggered on June 28, when the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, is set to be updated with data from May.
PCE and Core PCE trending down
The PCE price index showed inflation dropping to 2.65 percent in April, the first improvement since January. Core PCE, which excludes the cost of food and energy and can be a better indicator of underlying inflation trends, has been moving in the right direction for 15 consecutive months, falling to 2.75 percent in April.
Forecasters at Pantheon Macroeconomics are predicting the PCE price index will show inflation cooled more in May than many economists are predicting. Recent evidence that inflation will continue to ease includes:
- A slowdown in rent increases for new tenants as tracked by the Zillow Observed Rent Index
- A steady rise in jobless claims this year
- A sharp drop in housing starts and permits in May
Oliver Allen
“The sharp falls in total housing starts and building permits are surprising; they take both series to their lowest levels since June 2020,” Pantheon Senior U.S. Economist Oliver Allen said in a note to clients Thursday. “Lower rates will help sales eventually, but we expect them to be accompanied by a weaker labor market and a rising unemployment rate, thinning the ranks of potential homebuyers.”
The latest jobless numbers show claims for unemployment insurance during the week ending June 15 dropping slightly from the week before, to 238,000. But the four-week average increased to 232,750 — the highest level since September 2023.
“The Fed’s forecast that the unemployment rate will be unchanged throughout the rest of this year looks implausibly upbeat,” Pantheon Chief Economist Ian Shepherdson said in a note to clients Thursday.
Pantheon is forecasting that the unemployment rate will rise to 4.5 percent by the end of the year, up from 4.0 percent in May.
While Fed policymakers indicated they only expect to cut short-term rates once this year, futures markets tracked by the CME FedWatch Tool are expecting at least two cuts, with the first coming in September.
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