Last week, mortgage rates fell significantly without any cuts from the Federal Reserve, driven mainly by a weakening labor market. The critical question now is whether these rates can drop even further.
Earlier this year, economic weakness took the 10-year Treasury yield down to around 3.80%, but it didn’t breach that level. With the latest softer jobs report, the focus shifts to whether this yield can drop further, potentially reaching the “Gandalf line” at 3.37%. This crucial threshold was discussed in detail in the context of last week’s labor data.
10-Year Yield and Mortgage Rates
For 2024, the forecast included:
Mortgage rates between 7.25% and 5.75%
The 10-year yield between 4.25% and 3.21%
This year, the 10-year yield peaked at 4.70% as economic data and inflation exceeded expectations. However, mortgage rates didn’t rise as sharply due to improved mortgage spreads in 2024. With the labor market softening over several months, the 10-year yield now hovers around 3.80%, a pivotal level. As the Fed has not yet cut rates, it’s up to the bond market to adjust. Further rate reductions will likely depend on continued weak economic data.
Mortgage Spreads
In 2023, mortgage spreads were negatively impacted by the Silicon Valley Bank collapse and subsequent banking crisis, hitting new cycle highs. This year, spreads have improved more quickly than expected, aiding mortgage pricing. Despite not reaching average levels, the improvement is a positive development. If we used last year’s worst spreads, mortgage rates would be 0.49% higher now.
Purchase Application Data
Despite recent declines in mortgage rates, purchase application data has been flat, with four positive and four negative weeks. Early June’s three consecutive weeks of growth in purchase applications led to a surprising increase in pending home sales. However, from November 2023 onwards, there have been 16 positive, 17 negative, and two flat weekly data points. With rising mortgage rates earlier this year, demand fell, resulting in 10 positive, 17 negative, and two flat prints year-to-date for 2024.
Weekly Housing Inventory Data
Inventory growth has been the best story in 2024. Higher inventory levels are essential for a functional housing market, unlike the scarcity from 2020-2023. This year, inventory growth has been robust enough to prevent another unhealthy market scenario when mortgage rates fall. Weekly inventory increased by 6,482 last week, and this growth is crucial for a regular housing market.
Weekly inventory change (July 26-Aug. 2): 677,246 to 683,728
Same week last year (July 27-Aug. 3): 485,743 to 488,607
All-time inventory bottom in 2022: 240,497
Yearly inventory peak for 2024: 683,728
Inventory in 2015: 1,195,876
New Listings Data
New listings data is another positive factor contributing to inventory growth this year. Although the peak seasonal weeks did not meet the minimum target of 80,000 new listings, growth was still observed. This seasonal decline is normal.
New listings last week:
- 2024: 67,085
- 2023: 60,766
- 2022: 73,177
Price-Cut Percentage
Typically, one-third of homes undergo price cuts annually. With elevated mortgage rates, the price-cut percentage is higher than the past two years. Adjusting to labor force growth from all-time low demand, some U.S. regions have higher inventory levels than national data. The price-growth data is expected to cool in the second half of the year.
Price-cut percentages:
- 2024: 39%
- 2023: 35%
- 2022: 38%
Pending Sales
Pending sales data from Altos Research shows real-time demand. With more sellers also being buyers, there is slightly more demand this year. Purchase application data typically looks ahead 30-90 days. Real growth was observed at the end of 2022 and 2023 when rates fell by over 1%.
Pending sales:
- 2024: 379,482
- 2023: 364,934
- 2022: 405,466
The Week Ahead
This week will be relatively calm in terms of data, but Monday’s ISM and PMI reports, particularly the service sector report, will be noteworthy. Bond auctions and a speech by Fed President Barkin are also scheduled. Given the current 4.3% unemployment rate, speeches by Fed presidents will be closely scrutinized.
In conclusion, while mortgage rates have already declined, the potential for further reductions depends heavily on continued economic softness and bond market adjustments in response to ongoing data.
