Mortgage rates cool again ahead of the Fed’s December meeting

After briefly crossing the 7% threshold, mortgage rates have moved lower in the past two weeks. And they have the potential to continue dropping by the end of the year, depending on how markets react after next week’s Federal Reserve meeting.

At HousingWire’s Mortgage Rates Center on Tuesday, the 30-year conforming rate averaged 6.87%. That was down 11 basis points (bps) from a week ago and represented a second straight week of declines. Rates had been on the upswing since early October. The 15-year conforming rate stood at 7.01%, also down 11 bps in the past week.

According to the CME Group’s FedWatch tool, market observers continue to place higher odds on a Fed rate cut next week. On Tuesday, 86% of interest rate traders predicted a 25-bps cut, which would lower the federal funds rate to a range of 4.25% to 4.5%. Three weeks ago, only 60% of traders anticipated such a move.

If the 25-bps cut occurs, benchmark rates will be down a full percentage point from their levels prior to the Fed’s September meeting. But mortgage rates haven’t moved in tandem with the Fed’s actions. The cost of a 30-year home loan has risen from 6.31% to 6.87% since the central bank initially began cutting the overnight rate in mid-September.

Still, consumers appear to be noticing the Fed’s policy moves and seem to be more accepting of a higher rate environment. Fannie Mae reported Monday that its monthly Home Purchase Sentiment Index moved 0.4 points higher in November and is up 10.7 points year over year.

A record-high share of respondents believe that mortgage rates will decline in the next 12 months, while the share who say it’s a “good time to buy a home” has grown from 14% to 23% in the past year.

“A sharply growing share of consumers say they expect their personal financial situation to improve over the next year,” Mark Palim, Fannie Mae’s senior vice president and chief economist, said in a statement. “Additionally, more consumers expect home price growth to slow, a belief recently shared by our expert panelists as well, which may help ease some of the affordability burden and incentivize some households, especially those who have been waiting in the wings, to finally act on their home purchase decision.”

Optimal Blue data released Tuesday illustrated the negative impacts of higher mortgage rates in November. Locked loan volume was down 25% compared to November as the average conforming rate jumped 30 bps to nearly 6.8%.

But a positive trend arrived in the form of more Federal Housing Administration (FHA) loans, which accounted for 20% of all loans produced in November. Optimal Blue noted that the FHA market share was nearing its peak of 22% in November 2023.

“The rising percentage of FHA loans indicates affordability continues to be a concern among homebuyers as we move into year-end,” Brennan O’Connell, director of data solutions at Optimal Blue, said in a statement.

Existing homeowners took advantage of the short window of lower rates in September and October. Intercontinental Exchange (ICE) reported Tuesday that more than 300,000 refinances took place during these two months, the highest number in more than two years.

ICE also noted that borrowers with higher balances needed less incentive to refinance than those with lower balances. Among borrowers with balances of $250,000 to $375,000, nearly half required a rate reduction of at least 125 bps to pull the trigger. At the other end of the spectrum, borrowers with balances of $750,000 or more commonly initiated a refi with savings of only 50 to 75 bps.

While criticism of Federal Reserve Chair Jerome Powell has mounted since the Fed’s rate-hike campaign began in 2022, inflation has softened significantly and the U.S. economy continues to perform well by many measurements. President-elect Donald Trump — an outspoken critic of Powell in the past — told NBC News this week that he would not seek to replace Powell prior to the end of his term in 2026. This could bring stability to the mortgage market through consistent policy decisions.