Assessing the effect on mortgage rates after Fed pause

While Federal Reserve Chairman Jerome Powell on Wednesday commented on the role past rate increases had on the housing market, observers looking into their crystal ball following yesterday's meeting are not clear about the future.

It doesn't help that the 10-year Treasury yield used in pricing 30-year fixed rate mortgages rose to a 52-week high on Thursday morning at 4.49%, topping the previous peak of 4.37% at Tuesday's close.

That earlier run-up was in anticipation of the Federal Open Market Committee doing exactly what it did: not raising short-term rates.

Freddie Mac's Primary Mortgage Market Survey found the 30-year fixed-rate mortgage increased by 1 basis point to 7.19% as of Sept. 21 from the prior week. It is 90 basis points higher than the 6.29% reported for the same week in 2022.

Next week's survey results are likely to bake in reactions to the pause, given the short time frame between the FOMC meeting and the Freddie Mac release.

The 15-year FRM rose 3 basis points to 6.54% from 6.51% the week earlier and 5.44% a year ago.

Sam Khater, Freddie Mac chief economist, alluded to rates remaining above 7% for the sixth week in a row even with the Fed pause.

"Given these high rates, housing demand is cooling off and now homebuilders are feeling the effect," Khater said in a press release. "Builder sentiment declined for the first time in several months and construction levels have dipped to a three-year low, which could have an impact on the already low housing supply."

The 30-year FRM as tracked by Zillow rose 9 basis points on Thursday morning from the previous day to 7.13%. Seven days ago, this rate was at 6.94%.

This increase is a result of "investors [coming] to grips with the possibility of the path to 2% core inflation potentially taking longer than previously expected," Orphe Divounguy, senior macroeconomist at Zillow Home Loans said in a Wednesday night statement.

Mortgage rates are likely to stay elevated as investors react to FOMC members' expectations that it could take longer than projected for core inflation to return to target levels.

As for the future direction of mortgage rates, "the impacts of tighter credit conditions, rising oil prices and student loan repayments are all expected to cool the labor market further and lower economic activity in the coming months," Divounguy commented. "A large slowdown in consumer spending and an uptick in the unemployment rate would pull longer term yields and mortgage rates lower."

The decision to pause in September means "mortgage rates are likely to bounce around a bit as the markets digest upcoming economic data," said Melissa Cohn, regional vice president at William Raveis Mortgage, in a statement.

"If the data reveals that inflation remains elevated and employment is still growing, then mortgage rates are likely to move up and we can look for what we hope to be the last rate hike of this cycle," she continued

Most believe the FOMC will raise short-term rates at least one more time this year, noted Mike Fratantoni, chief economist at the Mortgage Bankers Association.

"We expect that inflation will continue to drop closer to the Fed's target, the job market will continue to slow, and that mortgage rates should begin to reflect that the Fed's moves in 2024 will be cuts — not further increases," Fratantoni said in a statement. "This should provide some relief in terms of better affordability for potential homebuyers."

However, FOMC members changed their views from the June meeting and are now expecting to make fewer cuts in short-term rates during 2024, he said.

Inventory is the biggest hang-up for the housing market right now even as builders are affected by the latest surge in mortgage rates.

"Permits for single-family homes provide a positive outlook for the pace of construction in the year ahead," Fratantoni said. "If mortgage rates trend down in 2024 as we anticipate, the combination of more homes for sale and somewhat lower rates should support stronger purchase volume."