After a spike following the June 27 presidential debate, mortgage rates are declining due to growing expectations that the Federal Reserve will cut rates in September.
On Friday, mortgage rates fell after the Bureau of Labor Statistics revealed that job growth in April and May was lower than initially reported, and private sector hiring slowed in June.
Rates had risen post-debate but are now trending down as bond market investors, who fund most mortgages, anticipate a Fed rate cut in September.
Despite employers adding an estimated 206,000 nonfarm jobs in June, government hiring made up more than a third of this increase. Revised estimates for April and May showed 111,000 fewer jobs created, slowing quarterly job growth to 177,000 jobs per month from the previous year’s 220,000.
Mortgage Bankers Association Chief Economist Mike Fratantoni noted other signs of a slowing job market, including a rise in the unemployment rate to 4.1%, a deceleration in wage gains to 3.9% over 12 months, and a decrease of 49,000 temporary hires.
Private payrolls, excluding private education and healthcare, grew by only 54,000 in June, significantly below the six-month average of 101,000. Ian Shepherdson of Pantheon Macroeconomics predicts total payroll growth will drop below 100,000 by Q3 and suggests the Fed will cut rates more quickly than expected.
Pantheon Macroeconomics forecasts a total rate cut of 1.25 percentage points this year, beginning with a 25 basis-point reduction in September, followed by 50 basis-point cuts in November and December.
Futures markets indicate a high likelihood of a September rate cut, with the CME FedWatch Tool showing a 78% chance, up from 64% on June 28. However, only 27% of investors expect cuts to exceed 50 basis points this year.
Fratantoni mentioned that while the job market remains tight historically, recent data points to weakening. Reduced inflation data in the coming months will support the case for a September rate cut.
Yields on 10-year Treasury notes, often indicative of mortgage rate trends, fell 7 basis points on Friday, returning to pre-debate levels of around 4.28%. Yields had surged to nearly 4.5% post-debate due to concerns over inflation under a potential second Trump administration.
After nearing 7% on Monday, rates for 30-year fixed-rate mortgages have retreated, averaging 6.96% on Wednesday. Rates had previously hit a 2024 low of 6.50% on February 1 but rose to 7.27% on April 25 amid concerns about stalled inflation progress.
According to Optimal Blue, rates on 30-year fixed-rate mortgages fell for the third consecutive day following the Fourth of July holiday. The Mortgage News Daily survey showed a 9 basis point increase in rates after the debate, followed by an 11 basis point decline over Tuesday, Wednesday, and Friday.
Federal Reserve policymakers have stated they need more evidence of easing inflation before cutting rates. The personal consumption expenditures (PCE) price index, the Fed’s preferred inflation measure, showed a drop in the annual rate of inflation to 2.56% in May, the second consecutive monthly decline.
Additional reports indicating waning inflation include:
– The Institute for Supply Management (ISM) reported the manufacturing sector contracted for the 19th time in 20 months in June, with a 5 percentage point drop in the services sector from May to June.
– Initial jobless claims rose by 4,000 to 238,000 for the week ending June 29, with claims exceeding 240,000 in early June for the first time since August 2023.
Shepherdson believes substantial rate cuts are imminent due to deteriorating jobless claims, depressed hiring indicators, and businesses needing to reduce staffing costs amid high real interest rates and slowing sales growth.
The real estate industry is hopeful for lower mortgage rates. A weekly MBA survey showed a 3% seasonally adjusted decline in homebuyer demand for purchase mortgages for the week ending June 28, down 12% from the previous year.
Despite a gradual decline in the “lock-in effect” from higher rates, the July 2024 ICE Mortgage Monitor Report found that three-quarters of homeowners still have mortgages with rates below 5%.
