Your new mortgage may get cheaper

The Federal Reserve may start to lower interest rates in September. Get ready.

Jul 1, 2024 - 07:30

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So, you are scouring websites and newspapers, trying to find that perfect house or condo. But you're worried about one thing.

Where will mortgage rates be when the sale closes?

The short answer: Ask the Federal Reserve and Chairman Jerome Powell. And the betting, at least this past week, is the Fed may cut interest rates in September.

A different answer is: Follow the 10-year Treasury yield mortgage rates available on the Internet. Mortgage rates track Treasury yields.

The reason for saying this is: Slowly, the 10-year yield seems to be signalling rates are headed lower.

The yield closed Friday at 4.402%. True, that was up from 4.201% from the day before, but the yield is down 6.3% from a near-term peak in April and 12.4% from October 2023, when the yield was at about 5%.

Mortgage rates at the time were nearly at 8%. Now they're closer to 7%.

Rates on 30-year mortgages typically are priced about 2.3- to-2.5 percentage points above the 10-year yield.

Let's put these numbers into a real context. In October, a 30-year mortgage was costing about 7.8%.

With a $300,000 loan, 7.8% translates into a monthly principal and interest payment of $2,160 (not including taxes and insurance.)

Mortgage rates on Friday were quoted at 7%, maybe a little lower. So, the payment has dropped to $1,996, a 7.6% decline.

Not huge but noticeable.

At 6%, the monthly payment drops to $1,799.

Definitely noticeable.

The Fed's big priority: beating inflation

Standing in the way of lower interest rates is the Fed, which has been waging a stubborn, two-year campaign to rein in the inflation pressures that erupted as the Covid-19 pandemic eased and war erupted between Ukraine and Russia.

Oil and gasoline prices jumped, and the year-over-year change in the Consumer Price Index hit a high of 9.1% in June 2022.

That prompted the Fed to boost its key interest rate 11 times between March 2022 and July 2023. The rate, known as the federal funds rate, has been at 5.25% to 5.5% ever since.

More Real Estate:

The result has been to cut housing starts by 30% since early 2022 and existing-home sales 35% since January 2022, exacerbating an already large housing shortage.

Getting rates below 7% is key

So, to give housing deals a boost, rates need to come down. Maybe back to something under 6.5%, maybe lower.

Mortgage lenders can't wait. They see business jumping, especially for refinancings, if mortgage rates drop under 6%, according to Lew Sichelman writing in National Mortgage Professional magazine.

Rates did hit 6.6% this past winter, but inflation proved sticky, and the Fed declined to cut rates.

Thanks to benign inflation numbers in the last month, there's talk of a rate cut as early as September.

Home builders will rejoice. The iShares U.S. Home Construction ETF (ITB) fell 21.1% in the second quarter after rising 9.9% in the first quarter. Home builder PulteGroup (PHM) fell 8.7% in the second quarter after a 16.9% first-quarter gain.

Sooner or later, the Fed will move.

Joe Biden wants it. If Donald Trump wins in November, he will bellow for cuts.