August 27, 2024 – The Movement of Interest Rates

Economic Commentary

Mortgage interest rates have already moved significantly lower over the past several weeks. Where they move from here will be determined by many factors – not the least of which is the next jobs report to be released next week. After the weaker report for the month of July another tepid or even moderate job report for August would just about clinch a rate decrease by the Federal Reserve when they meet in mid- September.

Wait? The Fed has not already lowered interest rates? Then how come mortgage rates are going down already? This is just a reminder that the Federal Reserve directly controls short-term rates. The Federal Funds Rate is the rate banks charge each other for short-term lending. How short-term? Literally, overnight. Banks are constantly getting deposits and making loans, and they are required to keep a certain reserve requirement each day. Therefore, if they are short of this requirement, they may have to add reserves overnight. When the Fed changes the Federal Funds rate, certain short-term rates move automatically, for example the prime lending rate.

Long-term rates are indirectly affected by the movements of the Fed. However, the bond market trades every day just like the stock market. Thus, while they are influenced by the Fed’s moves—long-term rates can move in anticipation of Fed activity. For example, when the last jobs report was released, long-term rates such as mortgage rates moved down immediately. Yet, short-term rates such as the three-month Treasury did not move nearly as much. Thus, if we have a weaker jobs report for August, mortgage rates may move down again. But don’t expect rates to move down when the Fed lowers their Federal Funds rates because the markets would have already anticipated that move. That is, unless the Fed surprises the market and makes a bigger move than expected — such as 0.5 percent decrease instead of .25 percent.

Weekly Interest Rate Overview

Freddie Mac reported that mortgage rates were slightly lower in the past week, continuing to hold to their recent lows of the past year. In a major speech last week, Fed Chair Powell delivered an indication that rates cuts are coming which should keep the lower rate trend on track. 30-year fixed rates fell to 6.46% from 6.49% the week before. In addition, 15-year loans decreased to 5.62%. A year ago, 30-year fixed rates averaged 7.23%, over 0.75% higher than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Although mortgage rates have stayed relatively flat over the past couple of weeks, softer incoming economic data suggest rates will gently slope downward through the end of the year. Earlier this month, rates plunged and are now lingering just under 6.5 percent, which has not been enough to motivate potential homebuyers. Rates likely will need to decline another percentage point to generate buyer demand.” Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Real Estate News

The market is getting more buyer friendly as a result of a combination of increasing inventory levels and price decreases, according to Realtor.com’s July housing data. In July 2024, the number of active homes for sale increased by 36.6% from the same month the previous year, reaching a post-pandemic high. At the same time, the percentage of listings with price reductions reached 18.9%, the highest level since October. “The inventory scars of the pandemic-era housing market are continuing to fade,” said Danielle Hale, Chief Economist of Realtor.com. “Although active listings are still short of the pre-pandemic mark, we saw the gap continue to narrow meaningfully as active listings hit a post-pandemic high. As sellers continue to list homes and buyers become choosier, the time a home spends on the market is extending, thereby helping the housing market move in a more buyer-friendly direction. In response, sellers are curbing expectations and reducing listing prices more often which could set the stage for more sales this fall, especially if mortgage rates continue to decline.” The total number of properties for sale climbed by 22.6% nationwide, marking the ninth consecutive month of growth and exceeding the 22.4% rate from the previous month. Although inventories remain below pre-pandemic levels, the difference between the levels in 2017–2019 and the current levels is decreasing. Source: Mortgage Point

ATTOM released its second-quarter 2024 U.S. Home Equity & Underwater Report, revealing that 49.2% of mortgaged residential properties in the U.S. were considered equity-rich. ATTOM defines equity-rich as the combined estimated amount of loan balances secured by those properties being no more than half of their estimated market values. The most recent quarter’s result is an increase from 45.8% in Q1 and reversed a series of three straight quarterly declines. The portion of homes that are seriously underwater declined to 2.4% in the quarter, down from 2.7% last quarter and the lowest level since at least 2019. ATTOM defines seriously underwater mortgages as those with combined estimated balances of loans secured by properties that are at least 25% more than those properties’ estimated market values. The equity gains come amid another spike in home prices, with the median national home price up 9% to a new record of $365,000. “Homeowner wealth took a notable turn for the better during the second quarter as equity levels piggybacked on some of the biggest home-price spikes we’ve seen in recent years,” said Rob Barber, CEO for ATTOM. “After a period where equity seemed stagnant or even declining, this brought another boost of good news for homeowners from the enduring housing market boom. Supplies of homes for sale remain limited these days and buyer demand is typically elevated during the summertime. So, it should be no surprise if home values go even higher and take equity along for the ride.” Source: MBA

Qualified older Americans may be able to use a reverse mortgage not just to stay in their current home but also to buy a new home. Reverse mortgages were first written in 1961, according to Investopedia. They became better known when President Ronald Reagan signed the Housing and Community Development Act into law in 1988. Since then, the U.S. Department of Housing & Urban Development and the Federal Housing Administration have worked to add safeguards through federal regulations, insurance and more stringent qualifying criteria. Today, qualified older Americans may be able to use a reverse mortgage not just to stay in their current home but also to buy a new home. Buyers, who must be at least 62, must demonstrate they have the income to pay real estate taxes and the cost of homeowner insurance and can afford to maintain their home, whether a single-family home or a condo, says Steve Resch, vice president of retirement strategies with Finance of America Reverse, based in Tulsa, Okla. Those who might benefit most are homeowners who want to access capital without affecting their budget or savings, because borrowers have no required principal or interest payments for as long as they are living in the property. A reverse mortgage could also benefit those who might outlive their retirement savings. The reverse mortgage amount will range from 35% to 60% of the value and is determined by the age of the youngest borrower, the current appraised value & of the home and current interest rates, says David Tourtillott, a loan originator with Homestead Mortgage LLC in Hyannis, Mass. Available funds can be left in a line of credit, which can appreciate over time, Resch says. “A borrower can use them for a variety of needs, from in-home health care to HOA costs or to build an ADU,” he says. Once a borrower sells a house, the remaining monies are paid back, first to the reverse mortgage company. Some don’t like reverse mortgages because of the closing fee of 2% of the appraised value, plus origination and attorney fees. Resch doesn’t recommend them for borrowers who plan to live in their house for less than 10 years. Source: Realtor Magazine