Mortgage Rate Trends

The 10-year Treasury borrowing rate is 3.9%. Under normal circumstances and based on a normal historical spread between the two interest rates, the average mortgage rate should be 5.6% to 5.9% today. The mortgage rate spread is instead still abnormally high (at 250 basis points) and therefore yielding 6.4% average mortgage rate. One reason for the large spread is due to the cloudy balance sheet among small and regional banks who have exposures to deteriorating office loans. To raise cash, some banks are selling off mortgage loans and mortgage-backed securities. The Federal Reserve’s own reduction in holdings of Fannie and Freddie backed mortgage backed securities is also at play.

The latest Mortgage Nuggets newsletter brings some clarity to a question on everyone’s mind: where are mortgage rates headed? Projections from top industry firms suggest rates may hover around 6.34% on average by the end of 2025. What does this mean for Loan Officers? While no one can predict the future with certainty, these forecasts highlight a steady but elevated rate environment. Here’s why this matters: 1️⃣ Strategic Planning: 2025 will likely continue to challenge affordability for many borrowers. How can you position yourself to add value to their journey? 2️⃣ Goal Setting: Use these projections to fine-tune your 2025 production targets. What strategies will help you hit your numbers? 3️⃣ Client Conversations: Start prepping your clients now. Educating them about these potential trends can build trust and confidence in your guidance. How are you preparing for a 6%+ rate environment in 2025? What shifts in strategy, client engagement, or marketing are you considering to stay ahead? David Krichmar

Fed Cuts & Mortgage Rate Forecast for 2025 Question: Do you think mortgage rates will go down in 2025, around how much, and why? Answer: Yes, I expect 30-year conventional mortgage rates to go down to between 5.75% - 6.00% in 2025. With the July jobs report coming out at 4.3% unemployment, triggering the Sahm rule, I think a recession in 2025 is likely. We are not there yet, but unemployment will continue to rise, and few are discussing the gray rhino of commercial real estate losses, which is expected to peak in 2026. (For more on commercial real estate losses, follow Dave Wald, JAKE SHARP, and Michele Wucker). However, the 10-year Treasury rate + 2.25% is likely a solid base, and I do not expect rates to decline below 5.5% in 2025. Powell’s archenemy has been inflation, but he will have to cut the Fed funds rates. How many cuts and for how much? I’d be conservative, as inflation may creep upward next year. I’d estimate 1.25% – 1.5% by the end of 2025, which would leave the Fed funds rate between 3.75%-4.00% by the end of 2025. Andrea Lisi, CFA agrees with 3.75% - 4.00% if we can steer clear of a recession. https://lnkd.in/eYeapJKY This seems reasonable as the Fed’s dot plot from July shows that half of them think about 4.00-4.25%. https://lnkd.in/gWtmiMuf Haven’t we learned by now to stop fighting the Fed, and that Powell doesn’t like to cut? To me, this seems in line with a mild recession. The 10-year Treasury note was 3.84% this morning. As you can see, when the 10-yr minus the federal funds rate is negative and comes back up to 0, there is generally a recession. https://lnkd.in/etE5VNk9 As for mortgage rates? I did some analysis on this in October 2023, and I’m still satisfied with my findings. https://lnkd.in/gDzubx9U The average spread between the 10-yr Treasury rate and the average mortgage rate is known to be about 170-175 bps. However, the Fed not buying Treasuries still increases the spread by 50 bps. So 225 – 250 bps. (3.75% - 4.00%) + (2.25% - 2.5%) = 6.00% – 6.50% But I know what you’re thinking… That’s close where we are now. Surely rates are going to go down, right? So… what if there is no recession, or what if the 10-yr stays at least 50-75 bps less than the Fed funds rate. In that case… (3.25% – 3.5%) + 2.25% = 5.5% - 5.75% All things considered, I can see mortgage rates on conventional mortgages getting in the mid to high 5s in 2025, but not lower. Say 5.75% - 6% by late 2025.

🧨 🤑 🏡 Mortgage originations are forecast to increase to $2.3 trillion next year, up from an expected $1.79 trillion in 2024, the Mortgage Bankers Association economists said at MBA Annual in Denver. ➡️ Purchase originations are forecast to increase 13% to $1.46 trillion next year. ➡️ The MBA expects 6.5 million loans in 2025, up from 5.1M expected in 2024. ➡️ Trade group expects mortgage rates to end 2025 at 5.9% ➡️ Delinquencies are expected to rise, especially FHA loans “We are bullish about the spring 2025 housing market. Mortgage rates at this level should support homebuyer demand and gradually reduce the lock-in effect, thereby increasing the inventory of existing homes and supporting higher purchase origination volume in 2025,” said Michael Fratantoni. Fratantoni said he expects the U.S. economy to slow down in the next year, with unemployment projected to hit 4.7%. Growing budget deficits will keep longer term rates from falling further, even as the Fed cuts short-term rates, he said. Joel Kan said that tens of millions of people are aged 30-40, which will support housing demand. But the affordability challenge is a nasty problem. He said it was "encouraging that an increasing share of first-time homebuyers have turned to newly built homes as an option, given the lack of previously owned starter homes on the market. These factors should support a bigger gain in purchase activity early next year, especially if mortgage rates remain near these levels or decline further.” Marina Walsh, CMB said there were positive signs for production profitability starting in Q2 2024, after eight brutal quarters. Production volume rose and per-loan costs fell.   “With more volume forecast in 2025 and 2026, lenders may be poised to increase their head counts after two of the most difficult years in the mortgage business, but cost escalation remains an ongoing concern,” she said. Walsh continued, “Mortgage servicing has enabled many lenders to stay profitable overall. We may see delinquencies rise modestly due to a slowing economy, natural disasters and payment shock from increasing property taxes, insurance and HOA and condo fees. Fortunately, between accumulated equity that stands at over $35 trillion and loan workouts, homeowners have more flexibility to resolve hardships.”