The average 30-year fixed-rate mortgage declined slightly to 2.86% for the week ending in August 19, according to mortgage rates data released Thursday by Freddie Mac‘s PMMS.
The week prior, mortgage rates rose to 2.87%, after six consecutive weeks of mortgage rate declines. This week’s slight decline tracks closely with downward-trending U.S. Treasury yields. The 10-year Treasury was slightly lower this week, after a rebound the week prior. The 10-year Treasury yield for August 18 was 1.27.
According to Sam Khater, chief economist at Freddie Mac, as with other parts of the economy, low housing inventory and price increases have dampened sales.
“Mortgage rates stayed relatively flat this week,” said Sam Khater, Freddie Mac’s chief economist. “Housing is in a similar phase of the economic cycle as many other consumer goods. While there is strong latent demand, low supply has caused prices to rise as shortages restrict the amount of sales activity that otherwise would occur.”
A year ago at this time, the 30-year fixed-rate mortgage averaged 2.99%. The 15-year fixed-rate mortgage rose slightly from the week prior, at 2.16%.
As rates change and the market shifts to a more purchase-driven origination environment, lenders need to carefully monitor margins and profitability. If we’ve learned anything in the past year, it’s that operational flexibility and accurate servicing valuation are key to lending profitability.
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Mortgage rates, for most of 2021, have stayed below 3%, in part because of aggressive monthly asset purchases by the Federal Reserve. There are signs, however, that the central bank will change its $120 billion in monthly purchases of U.S. Treasury bonds and mortgage backed securities.
In the July Federal Open Market Committee meeting, most participants “judged that it could be appropriate to start reducing the pace of asset purchases this year.” Goldman Sachs predicted that the central bank will begin to gradually taper its asset purchases in November, rather than in December.
For the time being, rates are low enough for a substantial portion of borrowers to refinance their mortgage. But that share is waning, and if rates rise, as many predict they will, observers expect refinances to decline further.
Last week, mortgage applications decreased 3.9% compared to the week prior and fewer borrowers opted to refinance, according to the latest report from the Mortgage Bankers Association.
As 30-year mortgage rates tracked by the MBA reached 3.06%, some borrowers opted not to refinance, which contributed to an overall decline in mortgage applications.
“The increase in mortgage rates caused a 5% decrease in refinancing, driven by a 7% drop in conventional refinance applications. Even though rates are 7 basis points lower than the same week a year ago, the refinance index is around 8% lower,” said Kan. “The eligible pool of homeowners who stand to benefit from a refinance is smaller now.”
The refinance share of mortgage activity decreased to 67.3% of total applications from 68.0% the previous week.
While borrowers weigh the benefits of refinancing their mortgage, in the purchase market, they have fewer choices.
The low inventory is not likely to substantially improve soon, although a percent increase from historically low levels is expected. This week, the U.S. Census Bureau reported that housing starts hit 1,534,000 for July, missing estimates. Builders are wary of repeating the mistakes of 2002 to 2005, when the market saw a glut of supply.
Accordingly, home prices have continued their dramatic rise. Home prices were up 16.6% year-over-year in May, per the latest S&P CoreLogic Case-Shiller National Home Price Index report.
Low rates would normally spur more homebuying. But persistently low inventory and a lack of affordability stand in the way. Per the Federal Housing Finance Agency’s purchase-only index, home prices are expected to grow 14.8% in 2021.
“For the housing market, at current case levels, the lack of inventories of homes for sale and continued supply chain bottlenecks experienced by homebuilders remain the primary constraints on home purchase activity,” said Mark Palim, Fannie Mae vice president and deputy chief economist. “Moreover, while mortgage rates have drifted downward and in theory provide greater purchasing power to potential borrowers, in practice, given current supply-side and affordability challenges, we expect that benefit to be limited.”