Fears of a recession in the U.S. sent shockwaves through financial markets around the world on Monday. The Dow-Jones dropped 1,000 points by 10:30 a.m. Eastern time, the NASDAQ lost up to 6% of its value and Japanese stocks suffered their biggest crash since 1987, with the Nikkei 225 stock index dropping 12.4%.
The turbulence should benefit the U.S. mortgage market, which has already seen big interest rate declines in the past week following a Fed meeting that teased forthcoming cuts to benchmark interest rates, along with a much weaker-than-expected jobs report.
“Bond yields have made a huge move lower and have made a big move up; it’s market madness on Monday, the 10-year yield is only down a few basis points as of this second,” HousingWire Lead Analyst Logan Mohtashami said at 10:32 a.m. EST. “Mortgage pricing should be lower today, but the close of today with the 10-year yield is key because short term bonds are very overbought.”
As of 11:08 a.m. EST, the 10-year Treasury yield hit 3.76%, the lowest reading since June 2023, while the two-year Treasury yield moved to 3.88%, which is generally a sign of recession.
Analysts at Keefe Bruyette and Woods (KBW) on Monday said that weak employment data drove market concerns about credit and fueled an interest rate rally. Mortgage spreads tightened at the same time, taking the Fannie Mae current coupon to 5.05%.
“If long-rates remains stable, this suggests that the 30-yr Freddie Mac fixed rate mortgage should fall from 6.73% last Thursday to ~6.3% next week. The market also sharply increased expectations for Fed rates, pricing in ~4.6 25 bp cuts by year-end, including a strong likelihood of a 50 bp cut in September,” the analysts said.
“Fed funds futures now imply the Fed Funds rate could be 200 bp lower by July 2025. This backdrop should favor the mortgage universe broadly as (likely) improvement in purchase activity should benefit originators/title insurers. … We also reiterate our OP on the mortgage insurers (ESNT is highlighted here) as we expect credit to stay strong unless home prices fall sharply, which we do not anticipate.”
Analysts at Bank of America said the markets view U.S. recession risk as rising and are projecting more than 100 bps of rate cuts before year’s end.
“Incoming data have raised concerns that the US economy has hit an air pocket,” they said. “Financial markets are now pricing in more than 100bp in rate cuts by year-end and significant probability of a 50bp cut in September. Markets even began discussing whether the Fed needs to deliver intermeeting cuts. A rate cut in September is now a virtual lock, but we do not think the economy needs aggressive, recession-sized cuts.”
Loan originators and mortgage executives told HousingWire on Friday that they were locking borrowers in the high 5% range on government loans and in the mid-6% range on conventional mortgages.
Last week‘s sharp mortgage rate decline, which saw most LOs improve pricing between 20 and 60 basis points, resulted in a surge in rate locks, originators said.
“For example, I locked one loan today that would have cost the borrower 1.213 points on Monday versus 0.375 today. This loan amount happens to be $610,000, and the cost of the rate went from costing $7,400 to costing $3,200 today,” said California-based Shannon Hoff of American Pacific Mortgage. “The average mortgage loan amount in the U.S. is $405,000, and saving an extra 80 basis points could equate to $150 to $250 a month, depending on the overall scenario. This is huge for borrowers.”
According to Hoff, borrowers best positioned to take advantage of these rates are those who have purchased or taken a cash-out refinance over the past 12 to 18 months. In addition, some borrowers are looking to buy now or have been prequalified this past year.
“They can take advantage of a lower payment or even qualifying for a higher purchase price if the DTI was a key factor in the preapproval,” she said.
Flàvia Furlan Nunes contributed to this report.