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So you’re browsing websites and newspapers, trying to find the perfect house or apartment. But you’re worried about one thing.
Where will mortgage rates be when the sale closes?
The short answer: Ask the Federal Reserve and its Chairman Jerome Powell. The bet, at least over the past week, is that the Fed may cut interest rates in September.
Another answer is: track mortgage rates on ten-year Treasury bonds available online. Mortgage rates track Treasury yields.
The reason I say that is: Slowly, the 10-year yield appears to be indicating that interest rates are heading lower.
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The yield closed Friday at 4.402%. That was up from 4.201% the day before, but the yield is down 6.3% from its near-term peak in April and 12.4% from October 2023, when the yield was around 5%.
Mortgage rates at that time were about 8%. Now they’re closer to 7%.
Interest rates on a 30-year mortgage typically range between 2.3 and 2.5 percentage points above the 10-year yield.
Let’s put these numbers into context. In October, the average 30-year mortgage rate was about 7.8%.
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With a $300,000 loan, 7.8% translates to a monthly principal and interest payment of $2,160 (not including taxes and insurance).
Mortgage rates were set Friday at 7%, perhaps a little lower. So the down payment dropped to $1,996, a 7.6% drop.
Not huge but noticeable.
At 6%, the monthly payment drops to $1,799.
Definitely noticeable.
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The Fed’s top priority: beating inflation
Standing in the way of rate cuts is the Federal Reserve, which has been waging a two-year campaign to rein in inflationary pressures that erupted as the Covid-19 pandemic subsided and the war between Ukraine and Russia erupted.
Oil and gasoline prices jumped, and the year-on-year change in the consumer price index reached a high of 9.1% in June 2022.
That prompted the Fed to raise its key interest rate 11 times between March 2022 and July 2023. The rate, known as the federal funds rate, has remained at 5.25% to 5.5% since then.
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The result has been a 30% drop in housing starts since early 2022, and a 35% drop in existing home sales since January 2022, exacerbating an already large housing shortage.
Getting rates below 7% is key.
So, to boost housing deals, prices need to come down. Maybe back to below 6.5%, maybe lower.
Mortgage lenders can’t wait. They argue that business will boom, especially with regard to refinancing, if mortgage rates fall below 6%, according to Lou Sichelman. Writing for National Mortgage Professional Magazine.
Interest rates reached 6.6% last winter, but inflation has proven stubbornly high, and the Fed has refused to cut rates.
Thanks to last month’s benign inflation numbers, there is talk of cutting interest rates as early as September.
Homebuilders will rejoice. iShares US Home Construction ETF (ITB) It fell 21.1% in the second quarter after rising 9.9% in the first quarter. Homebuilder PulteGroup (PHM) It fell 8.7% in the second quarter after gaining 16.9% in the first quarter.
Sooner or later, the Fed will act.
Joe Biden wants it. If Donald Trump wins in November, he will demand cuts.
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