In late March, the phone calls began to resume. Loan officers were suddenly asked different questions about pre-approvals, closing timelines, and whether it made sense to pull the trigger now, after spending the majority of the previous year dealing with awkward conversations with priced-out buyers. Something had changed, first softly and then more audibly. The average 30-year fixed-rate mortgage fell to 6.23% by the week of April 23rd, the lowest level the spring market had seen in three years.
This week a year ago, the same rate was 6.81%. It was 6.30% the week prior to this one. In isolation, none of those motions appear dramatic. However, when spread over three decades and a $300,000 loan, they amount to nearly a few hundred dollars per month, which is the kind of difference that determines whether a young family in, say, suburban Phoenix actually attends the open house on Saturday or, disappointed, scrolls past it. Even though the math isn’t working comfortably, there’s a feeling that it’s beginning to work again.
There is no mystery surrounding the move’s mechanics. Late last year, the Federal Reserve lowered its benchmark rate to a target range of 3.50% to 3.75%, and bond markets took time to process the implications for longer-term borrowing. Despite the common abbreviation, mortgage rates do not directly reflect the Fed’s funds rate. The 10-year Treasury yield serves as their benchmark, and since the Fed started reducing its holdings of mortgage-backed securities, the difference between the two has been abnormally large. For months, that spread compression has been identified as the missing component by Freddie Mac’s chief economist, Sam Khater. It’s coming at last.
It’s another matter entirely whether it lasts. A few weeks ago, someone referred to a 6.50% rate as “a foregone conclusion” in a forum thread on r/Mortgages. The comments that followed included both optimistic assessments of refinance success and pessimistic forecasts of a return to 7%. Those who locked in at 5.125% prior to last summer’s geopolitical commotion seem to be quite happy with themselves. The question of whether a refi at 5.99% pencils out after closing costs is being calculated by those who did not. One commenter described saving $200 a month as “not earth shattering but overall worthwhile,” which is arguably the most accurate assessment of the current situation that has been provided.
It’s difficult to ignore how quickly this market’s mood can change. Rates were predicted to be drifting upward rather than downward six months ago. Then the bond market began to act, the Fed took action, and the spring buying season appeared more promising than the winter had suggested. Applications for purchases are increasing. The volume of refinances has increased. For a few weeks now, pending home sales—the leading indicator that no one wants to overinterpret—have been slightly increasing.
This does not imply that the housing market’s issues have been resolved. The buyers who locked in 3% rates during the pandemic aren’t moving unless absolutely necessary, home prices in the majority of metro areas are still out of balance with incomes, and there is still little inventory in the desirable school districts. The system is not fully unlocked by a decline from 6.81% to 6.23%. For those who were already standing on the porch, it simply widens the door.
Even so, this spring’s check writers will write smaller checks than they did the previous year. That hasn’t been the path of travel for a very long time. Even if no one has yet to fully trust it, it is still worthwhile to pause.
