U.S. mortgage rates fell nearly a quarter point last week, touching the lowest levels since June, as the domestic housing market looks set to enter 2024 with renewed momentum and improving buyer demand.
The Mortgage Bankers Association said the average 30-year fixed rate for conforming loan balances of less than $726,200 fell 24 basis points (0.24 percentage point) to 6.83% for the week ended Dec. 15.
The move marks a sharp decline from the 7.9% rate printed in in late October, which was the highest since 2000.
However, the MBA's seasonally adjusted Purchase Index, which tracks mortgage applications for purchases of single-family homes, fell 0.6% from the previous week. Last month it hit the lowest levels since 1995.
"With the positive news about the drop in inflation, and the [Federal Reserve's Federal Open Market Committee] projections proclaiming a pivot towards rate cuts, the 30-year fixed mortgage rate reached its lowest level since June,” Mike Frantantoni, the MBA’s chief economist, said in a statement.
"At least as of last week, borrowers' response to this rate move was rather tepid. [Veterans Affairs] refinance applications jumped 18% for the week, but otherwise, both refinance and purchase applications showed small declines."
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Home construction increases sharply
The downward slide in mortgage rates, which are closely tied to 10-year Treasury bond yields, has been matched in part by a huge increase in new home construction. Builders are looking to unlock the housing market with more supply as sales of existing homes have dropped.
Existing-home sales fell to the lowest levels in 13 years this fall, according to data from the National Association of Realtors, with average prices rising 3.4% to around $391,800.
However, data published Wednesday showed existing home sales rose 0.8% to an annual rate of 3.82 million units, with average prices pegged at $387,600.
“US home sales remain on pace for the worst year seen in decades," said Selma Hepp, chief economist at CoreLogic. "It is unlikely 2024 will prove to be as bad, and we believe the market will slowly begin to tick up through the year, keeping a slow pace in step with the gradual reductions in the Fed rate and lower mortgage rates as the months tick pass."
Private housing starts rose 14.8% to an annual rate of 1.56 million units last month, the Commerce Department indicated Tuesday, taking the year-on-year gain to around 9.3%.
Builders broke ground on more single-family homes as well, with starts rising 18% on the month and a staggering 42.4% on the year.
'Slim pickings' in home-resale market: Comerica
"Most Americans can’t afford the typical house, according to the National Association of Realtors’ Affordability Index — but the minority who can face slim pickings in the existing home market, and so are buying more new construction than in a typical year and sustaining single-family homebuilding," said Bill Adams, chief economist for Comerica Bank in Dallas.
"The pullback in long-term interest rates will help both single-family and multifamily construction grow next year, contributing to overall economic growth and reducing the likelihood of a recession," he added.
The larger decline in mortgage rates comes amid one of the strongest Treasury bond market rallies in two decades. The moves have taken benchmark 10-year note yields to a mid-summer low of 3.89%. (Bond yields fall as prices rise.)
Traders have been betting heavily on the likelihood that the Federal Reserve, which sets the benchmark lending rate for the U.S. economy, will be lowering borrowing costs in the spring. The trades follow the publication of new GDP growth and inflation projections from Fed officials last week.
CME Group's FedWatch, a tool market watchers use to gauge the likelihood of changes to the Fed's key rates, suggests a 71% chance of a quarter-point rate cut in March. The odds of a move in May – including larger increases of as much as half a point – are pegged at 100%.
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