Have Mortgage Rates Reached Their Peak?

There is reason to believe that mortgage interest rates have reached, or nearly reached, their peak and are about to decline.

The Fed did not raise interest rates in their last announcement

There is nothing more telling than the Fed’s own behavior. Once people believe that the Fed has stopped its cycle of hikes, which even a single pause provides justification for believing, fixed-income investors are likely to move into the bond market to lock-in those high yields. This should produce downward pressure on mortgage rates.

The fact that we are headed into a presidential election year

That looks like it is going to be a very difficult contest suggests that the Fed will be under considerable political pressure to cut rates as we approach election day. Of course, in this venue, I have no interest in taking a side, but the economic consequences of political factors should be considered phlegmatically.  While some sincerely believe the Fed is apolitical, this election is more likely than any in the past to test that idea.

Wall Street’s S&P500 has been on its longest winning streak since June

This may indicate optimism about peaking interest rates. The stock market and bond markets live in a kind of antagonism with each other. When bond yields increase, stocks tend to do worse because debt gets paid before equity holders do. Of course, there are other things that could explain the performance of the stock market.

The labor market appears to be softening ever so slightly

The National payroll gain was below forecast, the unemployment rate is slightly higher, and wage growth has been moderating. These are all indications that the labor market is weakening. This slight weakening of the labor market signals a reduction in the inflationary pressures associated with wage growth: Furthermore, the Fed clearly planned to increase interest rates until “it broke something” or inflation fell below the 2% target rate. This might be the signal the Fed needs to halt the rate hikes. 

The Fed’s Fall loan officer survey just showed that banks are tightening credit standards

If banks think it necessary to tighten credit standards, then businesses will be less able to access liquidity when they need it. Furthermore, banks are showing that, while they are tightening standards, there is also a flagging number of loan applications: both to businesses and to households. The Fed is likely to see this as a sign that it approaching the point where interest rate hikes are nearly shutting credit markets down.

The Fed futures market shows no further rate rises priced in, with expectations of cuts by the end of the year

Of course, prediction markets are imperfect: But they are better than just about any other forecasting method mankind has devised, so they should be given serious attention. (As soon as someone devises a better method, he will soon use that method to make money on the prediction markets, rendering them superior once again.)

Read more: Hybrid models the best of both worlds

Ten-year U.S. Treasury yields have fallen about 50bps from October’s highs, signaling a potential peak in interest rates

As we all know, mortgage interest rates track the T-bill rate pretty closely even if the spread between the two has been increasing in recent months. Currently the spread is at 2.33% when it has historically averaged around 1.7%.

Declining oil prices are also encouraging for inflation watchers

As oil is a key economic input, the lower prices themselves suggest inflation might be moderating. Of course, if the situation in the Middle East worsens, this could renew inflationary concerns and wipe out the gains made in this space. That said, both US diplomatic action—and the movement of two US carrier groups to the region—suggest that the current turmoil will remain localized to Israel and the Gaza Strip.

Most of the major forecasts show mortgage rates dropping next year

However, those same forecasts showed rates dropping this year. So, they clearly aren’t faultless.

Read more: Why have mortgage rates rebounded?

Affordable housing has dried up

The lowest end of the market, as valued by AVMs, has virtually disappeared. Politically, given the emphasis placed on affordable housing and home ownership historically, the Fed will face pressure to shift its policy.

That said, some factors argue in the other direction. For example, inflation has ticked up since its June low: From 2.97% in June to 3.7% in September. So, the Fed’s fight against inflation may not be over. The job market may tighten in December due to holiday-related seasonal employment, but if January numbers don’t also show cooling, all bets might be off. In short, it looks like we have reached peak mortgage rates but things are far from certain.

Franklin Carroll

Franklin Carroll is Kukun's VP of Modelling and Analytics; After finishing his studies at the University of Chicago, he worked at Fannie Mae where he helped build Collateral Underwriter, roll out the Value Verify initiative, and specialized in collateral related and credit related policy.

Published November 8, 2023