US Mortgage Rates Drop To 6-Month Low: A Turning Point For The Housing Market?

After months of relentless interest rate hikes and dwindling volumes, the U.S. mortgage market is finally glimpsing light at the end of a long tunnel.

Recent data from the Mortgage Bankers Association (MBA) indicates a significant drop in mortgage rates, hinting at improved affordability and a potential revival in the housing market.

Key Developments In The US Mortgage Market

Drop In 30-Year Fixed Mortgage Rates:
- The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) declined to 6.83% in the week ending Dec. 15, 2023.
- This rate marks a sixth-straight week of declines and a new low since June 2023.
Economic Factors Influencing The Decline:
- Mike Fratantoni, MBA's SVP chief economist, attributes this decrease to positive news about inflation reduction and the Federal Open Market Committee’s (FOMC) pivot towards rate cuts.
- In its last meeting of the year, the Fed signaled that the median preferred interest-rate path suggests cuts totaling 75 basis points in 2024 and an additional reduction of 100 basis points in 2025.
- U.S. Treasury bond yields have significantly fallen, with the 10-year Treasury yield dropping from 5% in October to 3.90% as of Dec. 20, pushing long-term mortgage rates lower.
Mortgage Application Trends: While a 1.5% slowdown in the pace of new mortgage applications occurred last week, a year-over-year comparison shows a more favorable trend. The number of mortgage applications for purchasing a home, or refinancing one, are up by 18% compared to the same period last year.

Mortgage data released last week by Freddie Mac also unveiled a decline in the 30-year average rate below 7%. According to Sam Khater, Freddie Mac's chief economist, “given inflation continues to decelerate and the Federal Reserve Board's current expectations that they will lower the federal funds target rate next year, we likely will see a gradual thawing of the housing market in the new year."

Sector Performance

Lately, stocks in the real estate sector have experienced an impressive surge, with the Real Estate Select Sector SPDR Fund XLRE climbing 24% since late October. Particularly noteworthy within this sector is the performance of companies heavily influenced by residential mortgage rates. This segment, represented by the iShares Mortgage Real Estate ETF REM, has experienced a 30% increase in the same timeframe.

Standout performers in this sector include Arbor Realty Trust Inc. ABR and Claros Mortgage Trust Inc. CMTG, which have seen their stock prices soar by 29% and 39%, respectively.

Chart: REM vs XLRE 2-Month Performance