Mortgage Rates Drop 15 Basis Points, Boosting Applications 9.2%

Last week, a weak employment report sparked market expectations that the Federal Reserve would cut interest rates at its upcoming meeting, driving down benchmark U.S. Treasury yields. This, in turn, led to the largest six-month decline in the most popular U.S. mortgage rate.

The Mortgage Bankers Association reported that the contract rate for 30-year fixed-rate mortgages fell by 15 basis points to 6.49% in the week ending September 5, marking the lowest level since October of the previous year. This drop follows a cumulative decline of 60 basis points since mid-January, which has boosted both purchase and refinance mortgage applications.

The MBA's weekly mortgage application index rose 9.2% to 297.7 points, the highest level in over three years. This increase was primarily driven by a 12.2% rise in the refinance index, which reached its highest point in nearly a year. The MBA noted that refinance applications accounted for nearly half of all mortgage applications last week.

The purchase index also increased by 6.6%, reaching its highest level in about two months. Previously, high borrowing costs, elevated home prices, and limited market inventory had kept the U.S. housing market in a prolonged slump. However, recent data suggests that the industry's toughest period may be over. Currently, the supply of existing homes for sale is steadily increasing, annual home price growth is leveling off, and mortgage rates are expected to continue falling as the Federal Reserve is poised to start cutting interest rates as early as next week.

Since December of last year, the Federal Reserve has maintained the benchmark interest rate between 4.25% and 4.50%, citing concerns that the aggressive fiscal policies of the Trump administration could drive up inflation. However, despite a slight increase in inflation, Federal Reserve officials have grown increasingly worried about the weakening job market in recent weeks.

Both monthly employment reports for the past two months have fallen short of economists' expectations, and previously reported job growth figures have been significantly revised downward. Additionally, data released on Tuesday showed that the number of new jobs created over the 12 months ending in March was nearly 1 million fewer than previously reported.

The yield on 10-year U.S. Treasury notes, which banks use as a benchmark for setting mortgage rates, has fallen sharply due to the weak employment data, leading to lower mortgage rates. Since returning to the White House in January, the Trump administration has repeatedly called for interest rate cuts and has exerted pressure on the Federal Reserve, including frequent criticism of Federal Reserve Chairman Jerome Powell and recent attempts to remove Federal Reserve Governor Lisa Cook.

Market expectations, as reflected in interest rate futures, suggest that the Federal Reserve will announce a 25 basis point rate cut at the conclusion of its September 16-17 meeting. The probability of a 50 basis point cut, as indicated by futures prices, is around 7%.