Why lower rates might not help lenders

Falling mortgage rates will not drive increased existing home sales activity through the rest of the year, with the annual pace expected to fall to the lowest level since 1995, the latest Fannie Mae economic forecast said.

It's not just the reaction to falling rates that is confounding observers. Inventory has also been on the rise in recent months.

"Although mortgage rates have fallen considerably in recent weeks, we've not seen evidence of a corresponding increase in loan application activity, nor has there been an improvement in consumer home buying sentiment," Doug Duncan, who is retiring next week as Fannie Mae's chief economist, said in a press release. "We think it's likely that many would-be borrowers are waiting for affordability to improve even further, and that some may be anticipating additional declines in mortgage rates given expectations that the Fed will lower the federal funds target rate."

The Mortgage Bankers Association's latest Weekly Application Survey did report a 14% increase in volume for the period ended Sept. 13 over the prior week. Refinance application submissions increased 24% and now are more than half of the volume. Purchase volume was up 5% week-to-week and 0.4% lower than the same time in 2023.

Fannie Mae's forecast was compiled prior to, but in anticipation of this week's Federal Open Market Committee meeting. It also was finished prior to the release of housing starts data that showed activity in this market segment was at its highest level since April.

"Increasingly, regional variations in housing supply are creating divergent affordability conditions and experiences for consumers on both sides of the home sales transaction; however, taken as a whole, home sales activity, particularly on the existing side, remains near what we consider to be the floor of basic demographic and household mortgage demand," said Duncan. "Supply has risen significantly in many Sun Belt states, where such factors as ease of new home development and increasing insurance costs are having an impact, but at the national level the supply shortage still very much applies."

Some of those potential buyers remaining on the sidelines might be waiting for their household income to improve further to offset those higher prices, or they may be thinking that future supply growth will ease affordability, he stated.

A report from Redfin on its own data said that existing home sales were at their lowest level since 2012 (with the exception of the pandemic-impacted month of May 2020), while pending sales were at the lowest level on record, except for April 2020.

Some consumers are waiting to buy, hoping that mortgage rates will fall further, while others are confused about the new National Association of Realtors' rules regarding how buyer's real estate agents are compensated or are they waiting to see how the presidential election shakes out, Redfin agents are telling the company it said in a press release.

Some consumers might not realize rates had been falling, because they were waiting for the FOMC to act at the September meeting, Michael Cendejas, a Redfin agent from Sacramento, California, surmised.

As a result of its pessimistic view of the existing home sales market for the rest of the year, Fannie Mae cut its origination forecast for 2024 down to $1.68 trillion from $1.699 trillion. Purchase production is now expected to be $1.305 trillion compared with $1.325 trillion in August's forecast. The refinance volume outlook was increased to $375 billion from $374 billion even though Fannie Mae has now cut its mortgage rate forecast starting in the fourth quarter through the end of next year.

While its third quarter prediction for the 30-year fixed-rate mortgage average remains at 6.6%, for the following three months, it now expects rates of 6.2%, down from 6.4%.

Rates should now cross below the 6% threshold in the second quarter and average 5.7% in the fourth quarter of 2025.

As a result, it raised its full-year 2025 production forecast to $2.155 trillion from August's $2.145 trillion. But it held to its views of a slower purchase market, cutting that prediction to $1.506 trillion, compared with last month's $1.518 trillion.

That means Fannie Mae is more optimistic about the refi business next year, which it now predicts to come in at $649 billion versus August's $627 billion outlook.

The data shows a mortgage market that is ready for recovery in 2025, technology company Maxwell's second quarter mortgage lending report concluded.

With economic data signaling a cooling job market and a falling Treasury yield, a market turnaround finally appears to be in sight," Maxwell said. "As lower rates trigger buying activity and the next wave of refis, lenders will see pent up demand translating into major business.

"Maxwell data shows that today's loan volume is nearly 30% below the three-year average — leaving plenty of room for a dramatic influx in business as rate cuts materialize."