Buyers need lower rates to get back in the game.
In anticipation of the Fed’s rate cut last month, more would-be homebuyers applied for mortgages. Unfortunately, that rate cut has done little to jumpstart the beleaguered U.S. housing market.
Case in point: Existing home sales in September fell to a seasonally adjusted annual rate of 3.84 million—the lowest monthly rate since October 2010 (see the chart). Existing home sales are currently on pace for their worst calendar year since 1995.
Source: Bloomberg, calculations by Horizon Investments, data as of 10/28/2024.
One reason: Mortgage rates haven’t dropped as much as potential homebuyers had anticipated. These rates tend to align loosely with the 10-year Treasury yield, which has been climbing recently despite the Fed's rate cuts, reflecting signs of a still-strong economy. As a result, the national average 30-year mortgage rate, according to Bankrate, now sits at 7.21%, up from lows of about 6.6% in mid-September.
What’s more, mortgage rates today are approximately 300 basis points higher than the yield on the 10-year Treasury— double the long-term average spread of around 150 basis points. Several factors have caused that abnormally large spread, including bond market volatility, reduced investor demand for mortgage-backed bonds, and barriers to mortgage lending at some banks.
The good news: The rising demand for mortgage applications seen around the Fed’s rate cut in September may translate to a bump in home sales in the coming month or two. And if volatility ebbs following the election, we may see the large spread between Treasury yields and mortgage bond yields start to revert toward its long-term average. A return to more normalized conditions in the mortgage market could help bring rates below 6%, even if the 10-year Treasury yield remains steady—providing the boost the housing market has been waiting for.
By Mike Dickson
Originally published on Oct. 31, 2024.
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