After hitting a 23-year high of 8% in October, mortgage rates have cooled down to the lowest levels since July. Some borrowers are even getting quoted in the 6% range.
A top-tier borrower with a 780 FICO score and a 25-30% down payment for a single-family vanilla 30-year fixed-rate mortgage was quoted 6.875% on Thursday, said Larry Steinway, senior vice president of mortgage lending and branch manager of Revolution Mortgage.
“We are definitely seeing an uptick in demand. There’s been increased activity in the last two weeks [more] than the last two months. When interest rates hovered around 8%, it really hurt affordability,” Steinway said.
The mortgage rate dip is welcome news for the housing market, but loan originators and industry executives emphasized that rates need to decline further and remain stable to reinvigorate buyers’ demand.
“It’s too early to tell December figures but we closed about 5% more transactions last month compared to November 2022. We locked in rates probably 25% more during that same period,” said Jon Overfelt, director of sales and principal at American Security Mortgage Corp.
“We see a little bit of pickup but not like you normally would because of seasonality,” Overfelt added.
If rates continue to drop, some LOs expect a small ‘bump’ in cash-out refis but traditional rate-term refis won’t be likely in the foreseeable future until rates are in the 5% range, LOs said in an interview with HousingWire.
“We need a continuity in rates”
Rates are quoted differently for every buyer depending on several factors – including their credit score, down payment and loan-to-value (LTV) ratio, as well as how many points they buy down upfront.
In other words, a borrower with a 700 FICO score and a 5% down payment won’t be getting a mortgage rate in the 6% range any time soon. Even a good-not-great borrower profile likely isn’t in the 6s yet without buying points or getting pricing exceptions from their lender.
Though conditions have undoubtedly improved from a dismal fall, mortgage rates today are still far higher than they were about a year ago.
HousingWire’s Mortgage Rates Center showed 30-year conforming rates at 6.998% on Monday. Compared to a year ago, it’s still well above 6.35%.
“If we compare 24 months ago, demand is way off. If I compare two months ago, demand is up. So if you look macro versus micro, you’re going to get a very different picture,” said Shane Kidwell, CEO of Dwell Mortgage. “We hit that point where we saw the worst and so it feels like we’re moving past that. How fast we move past that is up for debate.”
Loan originators are hopeful that mortgage rates will continue to decline as the spread between the 30-year fixed mortgage rates and the 10-year Treasury yield narrows.
Demand for approvals has definitely increased, but homebuyers are waiting to see if they will drop just as fast as they have come down recently, said Robby Oakes, managing director at CIMG Residential Mortgage.
Buyers want to know that they will be able to get a low mortgage rate when they lock in a rate. Rates are too volatile for buyers to have that confidence, Oakes noted.
After a fairly strong jobs report on Friday, rates ticked back up. All eyes will be on the CPI report and Fed meeting this week.
“When rates go up by a point, people sit on the sidelines. When rates go down by a point, people sit on the sidelines because the consumers and the sellers want to know what the market is going to be when they sell the house. We really need an orderly, return to normal rates,” said Oakes.
A potential small refi bump
With about 90% of mortgage holders having a rate below 6%, a traditional refinance boom isn’t likely in the cards for the next few years.
“For somebody to want to do a traditional refinance there has to be a financial incentive, right? They’ve got to be able to see a rate lower than where they are to do a traditional refinance,” said Kidwell.
“Today is not the best day for them to get a refinance. It’s the best day to start thinking about that process and reengaging,” Kidwell noted.
Loan originators say homeowners are reluctant to give up their low-rate first lien mortgages and lean towards tapping into their accumulated home equity through home equity line of credits (HELOCs) even if it means getting a second mortgage with a higher interest rate.
“There is a lot more inquiry for home equity line credit. People are afraid to give up that rate that has a three in front of their mortgage,” said Steinway.
ICE Mortgage Technology estimated tappable home equity – the value borrowers can borrow while still preserving at least a 20% equity stake in the home – was $10.6 trillion as of Q3 2023, nearing its 2022 peak.
“We’ve already seen there is more of a focus on home equity lines of credit and cash out refinances. Borrowers are not doing this because the rate is where they want it to be, their debt is where they don’t want it to be and so they’re consolidating debt or they’re using their equity to purchase something else or to pay something else off,” Kidwell noted.
While loan originators don’t expect a refi boom, they anticipate a small refi ‘bump’ stemming from cash-out refis.
“I think non-traditional refinances (cash-out refis), we’re probably going to see probably more of. Traditional refinances (rate-and-term refi), I don’t think I’d call it a refi boom. I think we might see a small refi bump,” said Kidwell.
Only a mere 14% of originations came from refis in Q3 and cash-out refinance loans fueled what is left of the small refinance market accounting for 92% of the third quarter activity, according to ICE Mortgage Technology.
Meanwhile, it will be a long time before the industry sees a traditional refi boom.
Most LOs don’t expect traditional rate-term refinance demand to return until the second half of 2025 and into 2026.
For 2024, roughly 75% of origination volume is expected to come from purchase loans.
The Mortgage Bankers Association (MBA) expects the 30-year fixed-rate mortgages to come down to 6.1% in 2024, followed by 5.5% in 2025. Fannie Mae has a more conservative outlook expecting rates to average 7.3% in 2024 before declining to 6.9% in 2025.
And for originations business to pick up, a stability of low rates as well as a supply in inventory would have to work in tandem.
“I don’t think things will pick up dramatically because there is still no inventory. Anytime you see rates drop, you can see business pick up. I think what we need is continuity of rates,” said Oakes.
