Mortgage Rates Are In Free Fall On Triple Whammy Of Economic News

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Be careful what you wish for, as the saying goes: Mortgage rates are in free fall this week and stock market valuations are plunging on fears that the economy is not only slowing down, but might be headed for a recession.

A triple whammy of economic news has investors fleeing stocks and piling into the safety of bonds — including investments that fund most mortgages — sending long-term interest rates on bonds plunging:

• On Wednesday, Federal Reserve policymakers hinted that they’re gaining confidence that they’ve got inflation under control enough to start cutting rates in September.
• On Thursday, the Department of Labor reported that the number of Americans filing initial jobless claims during the week ending July 27 jumped to 249,000 — the highest level in a year.
• That one-two combination was followed by a knockout punch Friday: Employers added just 114,000 jobs in July, down from 179,000 in June. The combination of more layoffs and less hiring helped push the unemployment rate to 4.3 percent in July, the Bureau of Labor Statistics reported.

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The jump in unemployment triggered the “Sahm Rule,” a recession indicator named for economist Claudia Sahm. Sahm’s research has shown the economy is likely to already be shrinking whenever the three-month moving average of the unemployment rate rises by 0.50 percentage points or more relative to the minimum three-month averages from the previous 12 months.

While mortgage rates have been coming down gradually since late April, the decline accelerated this week, as the orderly rotation out of stocks and into bonds turned into a rush for the exits Thursday and Friday.

Stocks got a lift from Wednesday’s Fed meeting on hopes that the Fed will start cutting rates in September and still pull off a “soft landing.” But shares in large companies tracked by the S&P 500 index lost 4 percent of their value in heavy trading Thursday and Friday morning.

“July’s poor employment report leaves the Fed looking woefully behind the curve with its decision to hold rates this week,” Pantheon Macroeconomics Chief Economist Ian Shepherdson said in a note to clients.

While investors had been expecting the Fed to cut short-term interest rates by 25 basis points next month — a quarter of a percentage point — the odds are growing that central bank policymakers will start out with a bigger 50 basis point cut, Shepherdson said.

The CME FedWatch tool, which tracks futures markets to predict the odds of future Fed moves, shows investors on Friday had priced in expectations that the odds are better-than-even the central bank will cut rates by 1.25 percentage points by the end of the year. That brings futures markets in line with the forecast Pantheon Macroeconomics has been making for months.

Tara Sinclair

“To be clear, the labor market still looks good today,” George Washington University economist Tara Sinclair posted on X. “We’re still seeing job gains, unemployment is still relatively low, and prime-age employment is at a historical high. But monetary policy works with a lag, so the signal from climbing unemployment is worrying.”

The flight to safety is pushing mortgage rates down, as investors who fund most home loans view mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac and Ginnie Mae as a safe place to stash their money. Demand for bonds and MBS pushes their prices up and yields down.

10-year Treasury yields plunge

Source: Yahoo Finance.

Yields on 10-year Treasurys, a barometer for mortgage rates, plunged 18 basis points Friday to 3.79 percent — a full percentage point lower than the 2024 high of 4.74 percent registered on April 25, and the lowest mark for 10-year Treasurys since Dec. 27. A basis point is one-hundredth of a percentage point.

Mortgage rates in free fall

At 6.58 percent Thursday, rates for 30-year fixed-rate conforming mortgages were down 69 basis points from a 2024 high of 7.27 percent registered April 25 to the lowest level since Feb. 1, according to rate lock data tracked by Optimal Blue.

Although Optimal Blue data lags by a day, lender data collected by Mortgage News Daily showed rates for 30-year fixed-rate loans coming down by an almost unheard-of 22 basis points Friday, to 6.40 percent.

That means mortgage rates were hitting new 2024 lows Friday.

But the dip in mortgage rates might not last, Zillow Senior Economist Orphe Divounguy warned, noting that Hurricane Beryl and heat waves weighed on the latest jobs numbers, and the Federal Reserve Bank of Atlanta’s GDPNow model estimates that the economy continues to grow at annual rate of 2.5 percent.

GDPNow “is not an official forecast of the Atlanta Fed” but a running estimate of real GDP growth based on modeled data. But the Institute for Supply Management’s Manufacturing PMI showed the economy continued to expand for the 51st month in a row in July. At 46.8 percent, the Manufacturing PMI was down 1.7 percentage points from June. But a reading above 42.5 percent indicates the economy is expanding.

Orphe Divounguy

“Without a shock that causes layoffs to rise, yields and mortgage rates aren’t likely to keep falling,” Divounguy said in a statement to Inman. “They could even rebound slightly as Fed policy adjusts to prolong the economic expansion. Much of the adjustment in Fed policy is already being priced into current interest rates. Lastly, with no anticipated changes to fiscal policy, government borrowing could also limit further declines in Treasury yields.”

Odeta Kushi

Similarly, First American Deputy Chief Economist Odeta Kushi noted that unemployment increased, “at least in part, because the labor force grew.”

“While lower mortgage rates will be welcome news for potential homebuyers, we also want a resilient labor market,” Kushi said in a statement. “Homebuyers need to feel confident about their jobs to make what is likely to be the biggest financial decision of their life.”

Payroll growth slows

Initial jobless claims jump

Unemployment climbs to 4.3% in July

Editor’s note: This story was updated to include perspective from Zillow Senior Economist Orphe Divounguy and First American Deputy Chief Economist Odeta Kushi, and to note that the 10-year Treasury yield dropped to 3.79 percent at Friday’s close.  

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Email Matt Carter