“While the Fed was doing planned tapering, mortgage rates were hit hard by the 10-year Treasury yield, which caused rates to rise as the Fed cut rates,” Merritt told HousingWire in an email.
In a statement issued last week, Bank of America Analysts labeled the December jobs report “shit” as farm payrolls jumped by 256,000 positions, above the six-month growth rate of 165,000. They also noted Fed officials’ revised forecast “indicated that inflation risks have been shifted higher.”
Inflation has been largely stabilized over the past two years but was still up 2.7% year-on-year in November, according to the Consumer Price Index. The CPI report for December is expected to be released on Wednesday.
“Thanks to the strong labor market, we now think the Fed’s tightening cycle is over,” Bank of America analysts wrote. “Economic activities are strong. We see little reason for further simplification. “
Interest rate brokers also place their bets on fixed rates. According to the CME Group’s FedWatch tool97% believe the federal funds rate will remain unchanged from 4.25% to 4.5% if Federal Open Market Committee (FOMC) concludes its next meeting on Jan. 29.
HousingWire’s 2025 Housing Market Forecast calls for “a continued gradual decline in mortgage rates to a range of 5.75% to 7.25% over the course of the year. This range implies that prices are not predicted to deteriorate dramatically, and there are no prices below 5%. The range allows for variation in the ups and downs of economic news during the year.”
Bank of America also faced the question of what it would take for the Fed to start raising rates again.
Analysts said their “fundamental case still holds for the Fed,” with 30 to 35 bps cuts still being priced into the market by the end of the year. But while “the Fed still thinks rates are tight,” a hike is likely if core inflation as measured by the Personal Consumption Expenditures (PCE) index exceeds 3% year-over-year, or if “longer-term monetary policy expectations remain unsustainable,” they wrote. . PCE growth stood at 2.4% in November.
Despite generally bleak housing market conditions, buyers appear more optimistic than last year. Fannie MaeDecember’s Home Purchase Sentiment Index showed that 42% of respondents expect mortgage rates to fall in the next 12 months, up from 31% by the end of 2023. And although only 20% of respondents say it’s a good time to buy. home, which has risen from a record low of 14% one year ago.
Merritt thinks mortgage lenders can take some comfort from that trend.
“If long-term rates stay high, the more comfortable home buyers will be – life goes on and it’s worth buying and selling,” he said. “In retrospect, 7% is still a good level. It doesn’t compare well with the recent historical declines we’ve seen since the financial crisis. It would take another major economic event to bring rates back below 5%.
BOK Financial is the 55th largest mortgage company in the country with $24.8 billion in mortgage repurchase rights (MSRs) as of the third quarter of 2024, according to the report. Inside Mortgage Finance measurements. Merritt said many operators are in a position to cash in on their existing book of business if rates fall and borrowers look to refinance at larger rates, as they did in the fall of 2024.
He believes that “mini refinance booms” are likely to occur whenever rates fall rapidly. That can be a boon for large utilities — any company that wants to buy more MSRs — where prices stay high for a long time.
“During periods of low volume, servicing is a great hedge against both future volume and revenue,” Merritt said. “Lending companies with service letters have been able to withstand the volatility caused by the increase in prices. There are various factors utilities will look at when purchasing MSRs such as product mix considerations, the current level of the storage pool, and location.”
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