Mortgage rates drop after CPI inflation report

Mortgage applications rose at lower rates last week

According to Mortgage News Daily, the average interest rate on the 30-year fixed-rate mortgage fell to 6.28% on Tuesday. It is now at its lowest level since mid-September.

The drop came after a lower-than-expected November CPI reading, a widely watched measure of inflation. The report sent investors rushing into US Treasuries, causing yields to fall. Mortgage rates are loosely tracking the 10-year Treasury yield.

“A second straight month of reassuring CPI data continues to make the case that inflation has turned a corner, but rates will be cautious about reading too much into this potential shift given the volatility in data over the past few months,” said Matthew Graham, chief operations officer at Mortgage News Daily. “The bond market will also want to see what the Fed is doing with this information in tomorrow’s updated Fed rate forecasts on the dot plot.”

A prospective homebuyer (left) is shown a home by a real estate agent in Coral Gables, Florida.

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Mortgage rates started rising earlier this year and accelerated in the spring and summer, with the 30-year lock-in rising from around 3% to well over 7% by the end of October. That sent the housing market into an early deep freeze. Existing home sales have declined for nine straight months, falling 24% year over year in October, according to the latest data from the National Association of Realtors.

But rates then fell sharply in November after the October CPI report indicated that inflation was cooling. The rate ended November at 6.63%. Some suggested, albeit cautiously, that the fall in interest rates could bring buyers back into the market.

“There’s been some very, very modest green shoots over the past few weeks as interest rates have come down, but I’m not ready to go back to the conversation we had in August when we were feeling better,” Doug Yearley, CEO of Luxury Home Builders Great brothers, said on the company’s quarterly conference call with analysts last week. Yearley was referring to a very brief fall in interest rates in August.

Redfin reported that homebuyer demand “started to pick up” in November. The demand index, which measures requests for home inspections and other home-buying services from Redfin agents, was up 1.5% mom but down 20% year-on-year in the four weeks ended Nov. 27.

The total volume of mortgage freezes is falling 68% annually as the housing market struggles with interest rates

“There’s been a handful of relatively good news for the housing market lately, but we’re far from over the hill,” said Taylor Marr, Redfin’s deputy chief economist. “Key homebuyer demand indicators are likely to be on a razor’s edge with any data news released on the Fed’s path to eventually cutting rates.”

However, all that optimism hasn’t translated into higher mortgage rate lockouts for homebuyers, which is generally an indicator of future home sales. Those rate fixes fell 22% in November compared to October and 48% year-on-year, according to mortgage technology and data company Black Knight.

“It’s still extremely unaffordable even if interest rates are falling, even if prices have been down for each of the last four months. We’re still less affordable than when the market peaked in 2006, and you’re seeing that reflected in the rate lockout numbers,” said Andrew Walden, Black Knight’s vice president of enterprise research strategy.

Walden points out that inventory is still about 40% below where it should be, while home builders continue to retreat and potential sellers remain on the sidelines. Even if prices weaken and interest rates fall, both are still significantly higher than what should be compared to income to make housing affordable by historical standards. And none of them are going to move that much anytime soon.

“As we move through 2023 you’re going to see prices continue to fall, you’ll see incomes hopefully continue to grow and eat up some of that gap and I think we’re likely to see that.” Interest rates are coming down from where they are today, but it’s going to be a long time before they get there,” Walden said.