The recent financial market volatility may bring a silver lining for millions of U.S. households: a potential drop in mortgage rates. This could offer a gateway for prospective homebuyers and an opportunity for those with high-rate mortgages to refinance.
The pace of the decline remains uncertain, with some analysts predicting it may take months. However, a significant reduction in yields on U.S. government securities, which heavily influence home loan costs, suggests mortgage rates will continue to fall from last week’s six-month low of approximately 6.70% for a 30-year fixed-rate mortgage, the most popular U.S. home loan.
This trend has already sparked increased interest. Google Trends data shows that searches for “refi” and “mortgage refinance” on Monday surged to their highest level in at least 90 days, nearly doubling since July 28.
“The last couple of days have been very busy for us with several enquiries coming in, and we expect that trend to continue,” said Alex Elezaj, chief strategy officer at United Wholesale Mortgage.
However, immediate action may be premature.
“People are definitely inquiring about where rates are and when it’s time to refinance. But so far, for most people, the rates haven’t dropped enough to make it worth their while to refinance,” said David Battany, executive vice president of capital markets at Guild Mortgage.
According to Intercontinental Exchange’s ICE Mortgage Monitor, over 4 million mortgages have interest rates of 6.5% or higher. Yet, the majority of existing loans have lower rates, indicating that rates still need to drop significantly to make refinancing beneficial.
“It only makes sense to consider refinancing if mortgage rates drop two percentage points below your current mortgage,” said Patricia McCoy, a professor at Boston College Law School. “If someone’s current mortgage is at 6%, it would probably only make sense to refinance if mortgage rates fall to 4% or lower, and we’re a long way from that.”
Awaiting the Fed’s Move
The Federal Reserve is anticipated to start cutting interest rates soon, but the impact on the struggling housing market remains uncertain. Existing home sales have declined for four consecutive months, though economists predict the Fed’s pivot could lead to a modest rebound later this year.
Home loan applications plummeted in early 2022 as the Fed prepared to raise interest rates to combat the worst inflation since the early 1980s. Mortgage rates more than doubled between January and October 2022, reaching their highest levels in over two decades, eventually exceeding 7% and peaking around 8% last year.
With home affordability severely impacted by rising mortgage costs and record-high home prices due to limited supply, applications for home loans hit a 30-year low last October and remain near those levels, according to the Mortgage Bankers Association.
The Fed’s rapid rate hikes, from near zero in March 2022 to a range of 5.25%-5.50% by July 2023, also dampened refinancing activity.
However, mortgage rates are now over a full percentage point below their late 2023 peaks, and the 10-year U.S. Treasury yield, crucial in setting home loan rates, has dropped by about half a percentage point since July 24.
While refinancing applications remain low by historical standards, they have recently climbed to a two-year high. MBA’s weekly data shows they now account for nearly 40% of total application volumes, up from around 30% a few months ago and nearing the highest levels seen during the Fed’s tightening cycle.
The ICE data indicates that the number of high-interest rate mortgages continues to grow, suggesting some borrowers could soon be in a position to refinance if rates continue to fall.
“It should be good for home buyers and home sellers, as we will find a new equilibrium, which will facilitate more sales and refis,” said Isaac Boltansky, managing director and director of policy research at BTIG. “However, it’s exceedingly difficult to see us returning to the lows seen during the COVID crisis anytime soon, if ever again.”
