Homebuyer Mortgage Demand Dips, Breaking 3-Week Streak

Mortgage rates are on the rebound despite encouraging inflation data, as Fed policymakers warn “higher for longer” rate strategy will remain in place until they see more conclusive evidence the economy has cooled.

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Demand for purchase loans dropped last week as mortgage rates rebounded, breaking a three-week streak of rising homebuyer demand, according to a weekly survey of lenders by the Mortgage Bankers Association (MBA).

The MBA’s Weekly Applications Survey showed applications for purchase mortgages fell by a seasonally adjusted 3 percent last week when compared to the week before, and were down 12 percent from a year ago.

Mike Fratantoni

“Mortgage rates moved higher last week, crossing the 7 percent mark, even as the latest inflation data has kept market expectations alive for a rate cut from the Fed later this year,” MBA Chief Economist Mike Fratantoni said in a statement. “Purchase applications decreased the final full week of June, even as both new and existing inventories have increased over the past few months.”

After dropping from a 2024 high of 7.27 percent registered April 25 to 6.81 percent in mid-June, rates on 30-year fixed-rate conforming loans have been climbing again, according to rate lock data tracked by Optimal Blue.

Mortgage rates on the rebound

Rates for 30-year fixed-rate loans were averaging 6.99 percent Tuesday, up half a percentage point from a 2024 low of 6.50 percent seen Feb. 1, according to Optimal Blue data.

Rates have been on the rise in recent weeks despite encouraging inflation data as Fed policymakers warn that they’re inclined to stick with a “higher for longer” rate strategy until they are firmly convinced that they’ve tamed inflation.

Michelle Bowman

Hawkish Federal Reserve Governor Michelle Bowman on June 27 told bankers that much of last year’s progress on inflation was due to factors that are less likely to be of help going forward, including easing of supply chain constraints, increases in the number of workers in part due to immigration, and lower energy prices.

Rates on conforming, jumbo and FHA loans surged Monday after bond market investors who fund most mortgage loans heeded warnings from financial analysts at firms including Goldman Sachs who warned that economic policies proposed by presidential candidate Donald Trump might reignite inflation and drive up long-term interest rates.

More data shows inflation is cooling

Since peaking at 7.1 percent in mid-2022, the Federal Reserve’s preferred gauge of inflation has been making steady progress toward the Fed’s 2 percent target.

The personal consumption expenditures (PCE) price index hit bumps in the road in the summer of 2023 and February and March 2024. But the latest PCE index reading, released on June 28, showed the annual rate of inflation dropping for a second-consecutive month in May, to 2.56 percent.

Core PCE, which excludes the cost of food and energy and can be a more reliable indicator of underlying inflation trends, hasn’t moved away from the Fed’s 2 percent target since January 2023.

The May PCE data show the Fed “has already done more than enough” to cool inflation, economists at Pantheon Macroeconomics said in their July 1 U.S. Economic Monitor newsletter.

“The consumer slowdown looks much more entrenched after last week’s data, and the inflation picture is improving rapidly,” Pantheon economists wrote. “Both stories suggest the Fed is running a real risk by signaling its intention to wait for more data before starting to ease policy.”

Since then, more evidence has emerged to support the thesis that inflation is waning, including:

  • Reports from the Institute for Supply Management (ISM) showed the manufacturing sector contracted in June for the 19th time in the last 20 months, and that the services sector contracted by 5 percentage points from May to June.
  • Initial jobless claims crept up by 4,000 during the week ending June 29, to 238,000, the Department of Labor reported Wednesday. Jobless claims surged above 240,000 during the week ending June 8 for the first time since August 2023.

Oliver Allen

“After surging to a nine-month high in May, the slump in the ISM (services) index takes it to its lowest level since the Covid shutdown in May 2020,” Oliver Allen, Pantheon’s senior U.S. economist, said in a July 3 email to clients. “Admittedly, the headline index has been a poor guide to actual growth in consumers’ spending on services over the past couple of years. Still, this report will lend support to the idea that growth is coming off the boil.”

Powell wants more evidence

Speaking at a European Central Bank monetary policy conference in Portugal Tuesday, Federal Reserve Chair Jerome Powell said recent data does “suggest we are getting back on a disinflationary path.” But Powell restated past warnings that Fed policymakers want to see more evidence that inflation is on a solid downward path to 2 percent before cutting rates.

The CME FedWatch tool, which tracks futures markets to predict the odds of future Fed moves, on Wednesday showed investors see a 73 percent chance of at least one Fed rate cut by September. That’s up from 69 percent on Tuesday and 59 percent on June 3.

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