How far will rates drop?
Question of the week: How far will rates drop?
Answer: Over what period of time?
Mortgage rates have their largest Friday to Friday rate drop since August 2009, a one-half of one-percent drop (0.500%), as determined by the WR&MU inputs (1.25 origination points, 740 FICO, 80% loan-to-value, purchase mortgage in Long Beach); and their lowest level in 18-months.
How much further will they drop in the somewhat near future? Let’s define that period of time as the next three months, taking us to the election.
Before we put forth our guesstimate, let’s look at why rates have plummeted this week.
Yesterday the Federal Reserve Open Market Committee (FOMC) announced it was not changing its benchmark interest rate. Following the announcement Fed Chair Jerome Powell had a news conference in he said without actually saying that the Fed will very (very) likely cut rates at its September meeting. As economic data in the past month or so pointed to a probable rate cut, some data created some doubt and some investors thought “possible” instead of “probable,” Powell’s comments led to markets pricing in a September rate cut.
The first Friday of every month is circled on everyone who follows the economy as it is when the Labor Department releases data for the jobs markets for the prior month. Strong job growth means strong economy, inflationary pressure, economic growth.
Contrarily, weak job growth means a slowing economy, lack of inflationary pressure, and concerns for a shrinking economy; i.e. recession.
After June added over 200,000 jobs, the consensus for the July report was 185,000 workers added to payrolls. The estimates were not close as the Labor Department reported only 114,000 new jobs in July and that the unemployment rate climbed to 4.3%, the highest level in about three years.
Without hesitating to read past the “one-hundred fourteen thousand,” investors reacted by selling stocks (prices drop) and buying fixed rate investments such as bonds and mortgages (prices rise causing rates to fall). I pictured the trading floors resembles this scene from one of the best movies to ever explain how markets work, Trading Places.
The jobs data appears to guarantee a Fed rate drop in September. The data also brought into the market the question of how much would the Fed lower rates? Prior to this morning the markets had just about fully priced a one-quarter of one-percent (0.250%) rate cut by the Fed next month. What appears to be priced into the market today is a one-half of one-percent rate cut.
Over the past year or so there have been Fed critics who feel its resistance to lower rates is harmful to the economy and pushing it into recession. If the jobs data is not a “one-off” (see below) and a trend, a recession in the very near term is possible, or likely; in which case larger rate cuts by the Fed will ensue.
Was the July jobs data a one-off? Was it a blip and in August we will see a spike in job growth from July’s very low number?
There is some disagreement as to how much of an impact Hurricane Beryl in early July had on the jobs data, just about the same week that the Labor Department uses to collect its job data. The Labor Department in the report stated Beryl had “no discernible effect on the national employment and unemployment data for July.”
Really? During the survey week for the employment report over a million customers in Houston were without power, that includes businesses that could not open, and many that have still not been able to open. It includes hundreds of thousand workers who could not get to work, or unable to leave their families. Unemployment claims spiked in Texas. By its own estimate, the Labor Department said 461,000 people were unable to work because of the weather in July. Considering July is typically a strong hiring month for temporary workers, shutting down one of the major urban areas of the United States limiting not only current workers from earning paychecks but also preventing employers from hiring.
Add me to those who think that July’s employment data is a bit of a one-off due to Beryl and other extreme weather, and wildfires. If this is the case, August should see a rebound in new hires to between 175-200,000 jobs. We’ll see.
As to rates between the beginning of August and the beginning of November; I think rates can down to 5.50%, perhaps a few days, or weeks a bit below that number. Do I think rates will drop to 5.00% by then? I do not. While consumers are slowing their spending, wages are still outpacing inflation, up 3.6% for the year in July, and the increase in the unemployment rate was due to more people entering the job market, not getting laid off.
Of course, a lot can happen in the three months. Turmoil, uncertainty, catastrophe, war, has a tremendous impact on rates—of which there is a lot going on in our nation and abroad.
Nice cover in case rates do drop more than you estimate.
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Rates for Friday August 2, 2024: As mentioned above, rates are down to their lowest level since February 2023 due to the largest Friday to Friday drop in fifteen years.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:
30-year conforming 5.875% Down 0.500%
30-year high-balance conforming 6.500% Down 0.375%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.
We agreed that it was a tie. No, not the final result of some Olympic event, the contest between Sammy the Dog and I.
Last week’s WR&MU mentioned in this space that Leslie was leaving for New York to help our daughter and her roommate move into a new apartment in Brooklyn after two years in East Harlem. I speculated that Sammy and I were wondering who would miss her the most. It was a tie.
He moped about more than I did, but he didn’t have to watch Jeopardy! alone, or ask “what should we do for dinner?” to get some guidance.
Speaking of the Olympics, I have a hard time following when there is a large time difference. I don’t know what is live, what is pre-recorded, and now with streaming where to find what events.
I do have circled on our calendar the dates and times for the Women’s Track 1500 next week as my mom’s cousin’s granddaughter, Nikki Hiltz, who won the U.S. Olympic Trials in Oregon last month, will be racing. For many years when we lived near Philadelphia and then New York, we spent holidays with each other’s families, and I have remained close to them. It’s pretty exciting to be able to cheer on someone you know at the Olympics—even more so if they share some DNA!
Go Nikki! Go USA!
