Incoming data will dictate future mortgage rate shifts, experts say

The Federal Reserve affirmed on Wednesday that its next key federal funds rate hikes will depend on incoming data. In turn, economists and housing industry experts have now turned their attention toward the June meeting, as that decision will dictate the future movement of mortgage rates.

The Fed’s move on Wednesday was well anticipated and should not cause a major shift in mortgage and other interest rates, experts noted. 

Mortgage rates should fall, as the bond market hasn’t really cared much about the last few rate hikes by the Fed. In turn, mortgage rates should be lower, Logan Mohtashami, lead analyst at HousingWire, said. 

Mohtashami anticipates that the Fed will push a pause on the interest rate hike in the next meeting, as the central bank is counting on credit getting tighter to create job recession. 

The impact of credit tightening by Fed officials has been unclear in the wake of both higher interest rates and turmoil in the banking system following the collapse of Silicon Valley Bank and Signature Bank in early March. Federal regulators also seized First Republic Bank and sold it to JPMorgan Chase Bank earlier this week.

Bonds rallied immediately after the news, sending yields down, as the market interpreted the Fed’s hints as an indication of a pause in tightening.

“The 2-year and 10-year US Treasury yields are down 2-3 basis points, which could help mortgage rates as the market digests the news and adjusts,” Jack Macdowell, chief investment officer at the Palisades Group, said.

On Wednesday afternoon, mortgage rates for 30-year fixed-rate mortgages were at 6.43%, according to HousingWire’s Mortgage Rates Center.

“If the economy picks up steam and the banking crisis doesn’t worsen, that might force the Fed to re-start rate hikes. However, for now, they seem OK to pause here,” Mohtashami said. 

Danielle Hale, chief economist at Realtor.com, was on the same page with Mohtashami about Wednesday’s rate hike decision, noting that it is unlikely to cause mortgage rates to shift dramatically. 

If economic indicators are lukewarm going forward, it should lead to a more sustained, gradual decline in mortgage rates — as the Fed is less likely to continue rate hikes, Hale noted. 

“However, above-expected hiring, price growth or other economic activity could lead to upticks in the mortgage rate in anticipation that tighter Fed policy will be needed,” Hale said. 

A hike in short-term rates is only indirectly impactful for mortgage rates, as mortgages are priced off of long-term rates. But when the Fed raises interest rates, it becomes more expensive for families to take out loans for home purchases.

The Mortgage Bankers Association (MBA) also expects the Fed to push a pause button on the rate hikes in June, noting that the Fed’s statement was consistent with a plan to pause rates at this level.

“Although recent speeches by Fed officials had indicated an increasing amount of disagreement regarding the next steps for policy, this was another unanimous vote,” Mike Fratantoni, chief economist at the MBA, said. 

The expectation of continued rate hikes has kept Treasury yields higher, even with expectations of an economic slowdown. This, in turn, has kept mortgage rates higher, Shampa Bhattacharya, senior director at Fitch Ratings, noted. 

“The home purchase market is more sensitive to a reduction in mortgage rates at current rate levels, with the refinance option still out of the money for a vast majority of homeowners (…).  Purchase mortgage application data as well as active listings have shown positive weekly growth recently in response to somewhat lower rates, though applications remain down 28-30% year over year,” Bhattacharya said.

Impact on housing and residential lending

It’s unclear what the Fed’s next decision will be, but the MBA is hoping for a rate hike pause. 

“If the central bank pauses its hike in June, potential homebuyers and their mortgage lenders may be breathing a sigh of relief,” Fratantoni said. 

While tighter credit conditions are expected to slow the pace of economic activity, the housing sector is already operating under tight credit, Fratantoni noted.

The MBA doesn’t expect the tight credit headwind to outweigh the benefits from somewhat lower mortgage rates. The housing market is likely pulling the economy out of this slowdown, as it typically does, the MBA said.

Looking ahead, Hale expected the rest of May to be a rocky ride for interest rates, including mortgage rates. 

“The Fed continues to remain vigilant, watching for signs that financial sector stresses have impacted the real economy. Most likely, this factor will remain a wild card for the next few meetings, as data continue to roll in,” Hale said.

If the Fed does raise rates again next month, home buyers will be scared of purchasing for several reasons, Dutch Mendenhall, founder at RAD Diversified REIT, noted.

Because there is still a relative low inventory of houses for sale, higher interest rates with higher home prices mean buyers may not find the house they want in the current price range. 

“Additionally, higher rates create higher debt-to-income ratio calculation, resulting in qualifying for lower mortgage amounts,” Mendenhall said. 

However, a higher interest rate environment can provide more opportunity for cash buyers. 

“Without having to worry about interest rates, cash buyers can be very attractive to sellers, as they know they can go to closing quickly, and as a result, cash buyers can find themselves in a much better position to negotiate a better sale price,” he noted. 

Regardless of whether mortgage rates will trend down or enter into a recession, potential buyers have a window of opportunity, Jerimiah Taylor, vice president of real estate and mortgage services at OJO, said.

“The spring market has been hotter than expected in many markets, and if you add the fuel of lower rates on what’s already happening, expect prices and competition to increase quickly,” Taylor said.

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