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Just a day after the Federal Reserve raised its benchmark interest rate, mortgage rates fell sharply.
The 30-year average fixed-rate mortgage fell to 5.22% on Thursday from 5.54% on Wednesday, when the Federal Reserve announced it was raising interest rates, according to daily mortgage news.
Prices haven’t moved much in the days leading up to the Fed meeting earlier this week, but have been slowly pulling back from their recent high in mid-June, when 30-year fixed rates briefly topped 6%.
Thursday’s drop came on the heels of a GDP report released by the Bureau of Economic Analysis, which showed the US economy contracted for the second consecutive quarter. This is a widely accepted signal of stagnation. Gross domestic product declined 0.9 percent at an annual pace for the period, according to advance estimates. Economists polled by Dow Jones expected growth of 0.3%.
After this news, investors rushed into the relative safety of the bond market, causing yields to fall. Mortgage rates loosely track the yield on 10-year US Treasuries.
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“This is an exceptionally fast drop!” Matthew Graham, COO of Mortgage News Daily wrote. “Perhaps most interesting (and uncommon) is the fact that mortgage rates have fallen faster than US Treasury yields. The opposite is usually true as investors flock first to the risk-free underlying bonds.
Graham said the big picture shift in interest rates over the past month has created a situation in which investors largely prefer to hold mortgages at low rates.
He added, “In a way, mortgage investors are trying to get ahead of the game. If they’re holding mortgages at a higher rate, they’re going to lose money if those loans get refinanced too quickly.”
The question now is whether the market is in a new range, and prices will stabilize where they are now.
“If prices reverse course, the volatility could be just as large in the other direction,” Graham cautioned. He also indicated that mortgage rates could fall even if gloomy economic data and moderate inflation persist.
Already, lower rates seem to have little effect on potential homebuyers. Real estate brokerage Redfin just reported that it noticed a slight uptick in searches and home tours in the past month, with rates coming off recent highs.
“The housing market appears to be stabilizing in equilibrium now that demand has stabilized,” Redfin chief economist Daryl Fairweather said in a statement. “We may still get some surprises when it comes to inflation and rate hikes by the Fed, but for now, the ease in mortgage rates has brought some relief to buyers who have been reeling from last month’s rate hikes.”
However, the increase in buyer interest did not translate into new contracts, nor into sales. The supply of homes for sale is slowly increasing, and there are reports of more sellers lowering their order prices.