Fed Rate Cut Expectations Drop Mortgage Rates To 4-Month Lows: Surge In New Applications, Refinance Demand
The anticipation of Federal Reserve rate cuts is starting to have a favorable impact on the real estate mortgage market.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) decreased by 13 basis points to 6.87% for the week ending July 12, 2024, down from 7% the prior week, as reported by the Mortgage Bankers Association Wednesday.
This decline represents the most significant drop in borrowing costs in around four months and the lowest rate since early March.
Fed Rate Cut Bets, Lower Treasury Yields Push Mortgage Rates Down
The reduction was largely propelled by rising expectations on Fed rate cuts and the fall in 30-year Treasury yields, a key indicator for long-term mortgage rates, which decreased by approximately 30 basis points month-to-date to 4.37%.
Market expectations for a 25 basis point rate cut in September have surged to nearly 100%, up from a 60% likelihood a month ago, according to the CME FedWatch Tool.
Joel Kan, the MBA's vice president, said, “Mortgage rates declined last week, as recent signs of cooling inflation and the increased likelihood of Fed rate cuts later this year pulled them lower.”
Rising Mortgage Demand
The 13 basis point reduction in mortgage rates has positively influenced demand, with applications for new mortgages and refinancing existing mortgages rising significantly last week.
According to MBA data, mortgage applications in the U.S. jumped by 3.9% in the third week of July, recovering from declines in the previous two weeks to achieve the sharpest increase in a month.
Refinancing applications, which are particularly sensitive to weekly rate changes, increased by 15% from the previous week, reaching their highest level in two years.
Market Reactions
The Real Estate Select Sector SPDR Fund (NYSE:XLRE) traded 1.33% higher at the time of publication Wednesday, after closing 1% higher Tuesday. The Vanguard Real Estate ETF (NYSE:VNQ) was up 1.27%.
Top performers in the premarket were:
- SL Green Realty Corp. (NYSE:SLG) up 2.30%.
- CubeSmart (NYSE:CUBE) up 1.90%.
- National Storage Affiliates Trust (NYSE:NSA) up 0.90%.
- Kennedy-Wilson Holdings, Inc. (NYSE:KW) up 0.56%.
- Alexandria Real Estate Equities (NYSE:ARE) up 0.54%.
- Vornado Realty Trust (NYSE:VNO) up 0.47%.
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