Mortgage rates slip slightly after Fed hike

The latest 25 basis point short-term rate hike, followed by news of a likely pause in further increases by the Federal Open Market Committee, is good news for housing, industry observers on the move say.

More immediately, the 30-year fixed rate loan as measured by the Freddie Mac Primary Mortgage Market Survey declined for the first time in three weeks, down 4 basis points to 6.39% from 6.43% on April 27. For this same week last year, this loan averaged 5.27%.

"This week, mortgage rates inched down slightly amid recent volatility in the banking sector and commentary from the Federal Reserve on its policy outlook," said Sam Khater, Freddie Mac chief economist in a press release.

Meanwhile, regarding this year's spring home purchase market "interested homebuyers are acclimating to the current rate environment, but the lack of inventory remains a primary obstacle to affordability," Khater continued.

But changes in the 15-year FRM in the latest PMMS bucked the trend in longer term loans, increasing 5 basis points to 5.76% from 5.71% last week; it was 4.52% one year ago.

The 10-year Treasury closed at a yield of 3.53% on April 27. While it closed on May 1 at 3.57%, the day after regulators shuttered First Republic Bank, it sank over the next two days to 3.4% at the end of trading on May 3.

By 11:40 eastern time on Thursday, it was down another 8 basis points.

"The Fed will remain prepared to further tighten policy until it sees more concrete evidence that inflation is waning", said Orphe Divounguy, senior macroeconomist at Zillow Home Loans, in a comment issued Wednesday night. "Until then, the yield on the U.S. 10-year Treasury will remain high, and mortgage rates — which tend to follow the 10-year — will also stay elevated."

Zillow's data found mortgage rates declined in the hours after Powell's announcement as a result of his comments about the issues in the banking sector.

Nathan Howard/Bloomberg

On Thursday morning, Zillow had the 30-year fixed averaging 6.15%, down 3 basis points from Wednesday, when it was 6.18% and from 6.27% one week prior.

Given that the hike was widely anticipated, it is unlikely to result in any major shifts in mortgage rates, said Odeta Kushi, the deputy chief economist at First American Financial.

"However, the updated language in the policy statement opened the door for a potential pause, which could put some downward pressure on the 10-year Treasury yield, and thereby mortgage rates," Kushi said. "A more 'dovish' Fed, worsening recession fears, and new data that suggests inflation is continuing to cool are factors that could prompt mortgage rates to decline."

But if inflation data comes in hotter than the Fed and markets expect, it is likely to put upward pressure on mortgage rates for months to come, Kushi continued.

"The Fed's signaling on a potential short-term pause in future hikes, however, could be more significant for mortgage originators," a statement from Shampa Bhattacharya, senior director at Fitch Ratings, said. "The expectations of continued rate hikes has kept Treasury yields higher, even with expectations of an economic slowdown, which in turn has kept mortgage rates higher."

This latest increase is likely the peak for the current cycle of economic tightening "and potential homebuyers and their mortgage lenders may be breathing a sigh of relief," Mike Fratantoni, chief economist at the Mortgage Bankers Association, said in a statement. "We continue to expect that mortgage rates will drift down over the course of the year as the economy slows, as we move closer to the Fed lowering rates beginning in 2024, and as financial market volatility finally begins to settle down."

The U.S. economy is already experiencing conditions that slow activity. "The housing sector is already operating under tight credit, so we don't expect this headwind to outweigh the benefits from somewhat lower mortgage rates," Fratantoni continued. "The housing market is likely pulling the economy out of this slowdown, as it typically does."

But while affordability will improve, it does not solve the other major problem for the housing market: the ongoing lack of existing homes for sale.

"The FOMC's indication it may step back from taking further action will not address the affordable housing shortage in the country that has been exacerbated by inflation," said David Dworkin, president and CEO of the National Housing Conference. "We need the Administration and Congress to address the critical need for affordable housing in this country and move forward with actions and policies that will increase our nation's housing supply."

Dworkin called on Congress to pass both the Neighborhood Homes Investment Act and the Affordable Housing Credit Improvement Act.

"Mortgage volumes are likely to remain under pressure in 2023 given rates remain relatively high," Bose George, an analyst at Keefe, Bruyette & Woods, said in a research note.

His outlook on the private mortgage insurers is positive following the Fed's actions because KBW expects residential credit "to hold up relatively well."

KBW remains "constructive" on real estate investment trusts that concentrate on agency mortgage-backed securities, "although given recent banking turmoil, spread tightening in the near-term seems unlikely. However, the sector generally performs well towards the end of tightening cycles."