The 30 Yr Fixed Mortgage is a staple of the US housing market. During the first half of 2022 94% of homebuyers selected a 30 yr fixed mortgage. This amazing product that allows you to keep your rate for thirty years, despite market fluctuations, and you can even refinance it if rates go down. While this product is very ordinary in our country, it’s not widely available across the rest of the world. Typically, banks offer adjustable-rate mortgages or ‘fixed rate mortgages’ that are fixed for 1-5 years before adjusting. From the lending perspective this mitigates the risk of interest rates rising which forces banks to offer bigger returns on deposits. In the US we have a unique secondary market for mortgages that is largely government-sponsored. Fannie, Freddie, and Ginnie all purchase mortgages from banks and securitize them into bonds. This frees up capital for banks to lend additional money and not fear rising interest rates when the mortgages they originate are fixed at lower rates.
Mortgage Rates improved slightly this week as the price of Mortgaged Backed responded favorably to job and inflation data. Rates are up approximately 1.25% from this time last year.
Jobs – The number of individuals filing for unemployment benefits for the first time remained at an elevated 262,000 bringing the 4-week moving average near 250,000. Continuing claims also remain at high levels. The job market has slowed.
Inflation – the headline figure on the Consumer Price Index (CPI) declined from 4.9% to 4.0%. The core rate (strips out food and oil) is down from 5.5% to 5.3% year over year. This 5.3% number, while higher than the Fed’s target, is down from a high of 9.1%. The Producer Price Index declined 0.3% in May, bringing the year over year Producer inflation down to 1.1%. The Core rate is down from 3.2% to 2.8%. As inflation declines, mortgage rates should follow suit.
The Fed decided to keep rates unchanged this meeting but based on the anonymous survey, which is represented in the dot plot above, members believe there will be 2 more 25bp hikes this year. Their protections are down 0.5% from their last meeting. Most members believe they will be cutting rates next year.
Mortgage Applications to purchase homes rose by 7.6% last week and remain down 27% year over year. Refinance applications declined 6% last week and are down 41% year over year.