Mortgage rates fall sharply after negative GDP report and Fed’s latest hike

Mortgage rates fall sharply after negative GDP report and Fed's latest hike

Just a day after the US Federal Reserve raised interest rates, mortgage rates fell sharply.

The average interest rate on the popular 30-year fixed-rate mortgage fell to 5.22% on Thursday from 5.54% on Wednesday as the Fed announced its latest rate hike, according to Mortgage News Daily. The price fell even further on Friday to 5.13%.

Rates hadn’t moved much in the days leading up to the Fed’s meeting earlier this week, but they had slowly eased off their recent high in mid-June when the 30-year fixed-rate bond briefly topped 6%.

A sign is posted in front of a home for sale on July 14, 2022 in San Francisco, California. The number of homes for sale in the US rose 2 percent in June for the first time since 2019.

Justin Sullivan | Getty Images

Thursday’s decline also followed the Bureau of Economic Analysis’s gross domestic product report, which showed the US economy shrank for the second straight quarter. This is a widely accepted signal of a recession. According to the flash estimate, annualized GDP fell by 0.9% over the period. Economists surveyed by Dow Jones had expected growth of 0.3%.

Following the news, investors rushed to the relative safety of the bond market, causing yields to fall. Mortgage rates are loosely tracking the US 10-year Treasury yield.

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“That’s an exceptionally fast drop!” wrote Matthew Graham, COO of Mortgage News Daily. “Perhaps even more interesting (and unusual) is the fact that mortgage rates have fallen faster than US Treasury yields. It’s usually the other way around, with investors flocking to the most fundamental, risk-free bonds first.”

Graham said the big shift in interest rates over the past month has created a situation where investors prefer to hold on to lower-interest mortgage debt.

“In a way, mortgage investors are trying to get ahead of the game. If they hold mortgages at a higher interest rate, they will lose money if those loans are refinanced too quickly,” he added.

The question now is whether the market is in a new range and prices settle where they are now.

“If interest rates reverse course, the volatility could be just as great in the other direction,” Graham warned. He also pointed out that if economic data remains grim and inflation eases, mortgage rates could fall even further.

Lower interest rates already appear to be having a slight impact on prospective homebuyers. Real estate brokerage firm Redfin was just reporting that there had been a slight uptick in searches and home tours over the past month as interest rates fell from their recent highs.

“The housing market appears to be heading into equilibrium now that demand has leveled off,” said Daryl Fairweather, Redfin’s chief economist, in a press release. “We may still see some surprises when it comes to inflation and Fed rate hikes, but for now, easing mortgage rates has brought some relief to buyers who have been battered by last month’s rate hike.”

However, the increased buyer interest has not translated into new contracts or sales. The supply of homes for sale is slowly increasing and there are reports of more and more sellers lowering their asking price.