As long as the economy is hot, mortgage rates will remain high

“Even as the Fed implements planned tapering, mortgage rates are more affected by the yield on the 10-year Treasury, causing rates to rise even as the Fed cuts rates,” Merritt told HousingWire in an email.

In a statement released last week, Bank of America analysts labeled the December jobs report “gangbusters” as non-farm payrolls rose 256,000 positions, well above the pace of growth of 165,000. They also noted a revised forecast by Fed officials that “indicates that inflation risks are tilted to the upside.”

According to the Consumer Price Index, inflation has moderated significantly over the past two years, but still in November. The CPI report for December will be released on Wednesday.

Bank of America analysts wrote: “Given the resilient labor market, we now think the Fed's tightening cycle is over.” “Economic activity is strong. We see little reason for further easing.”

Interest rate traders also place their bets on rates remaining the same. according to 97% believe the federal funds rate will remain between 4.25% and 4.5%. Federal Open Market Committee (FOMC) concludes its next meeting on January 29.

HousingWire calls for “mortgage rates continued to decline slightly over the year, from 5.75% to 7.25%. This range means that rates are not forecast to deteriorate dramatically, and rates below 5% are not in sight. This range captures the volatility for ups and downs in economic news throughout the year.”

Bank of America also addressed the question of what it would take for the Fed to start raising rates again.

Analysts said the “main case is holding the Fed,” with the market down 30-35 bps by the end of the year. But “while the Fed still thinks rates are restrictive, hikes may be possible if core inflation, as measured by the Personal Consumption Expenditure (PCE) index, exceeds 3% year-over-year or if “longer-term inflation expectations stabilize. they wrote PCE growth.

Despite generally gloomy housing market conditions, consumers are more likely than they were a year ago. Fannie Mae's December Home Buying Sentiment Index found that 42% of respondents expect mortgage rates to fall in the next 12 months, down from 31% at the end of 2023. Only 20% of respondents say it is a good time to buy. a home, up from an all-time low of 14% a year ago.

Merritt thinks mortgage lenders can take some comfort in this trend.

“The higher the prices, the more comfortable homebuyers will be with them – life goes on and houses must be bought and sold,” he said. “If you look at history, 7% is still a good figure. That doesn't compare well to the recent historic lows we've seen since the financial crisis. “It will take another big economic event to lower interest rates below 5%.”

BOK Financial is the nation's 55th largest mortgage servicer with mortgage servicing rights (MSRs) held at $24.8 billion as of Q3 2024. Within Mortgage Finance estimates. Merritt said many servicers are able to capitalize on their existing books of business if rates fall and more borrowers seek to refinance.

He believes that “mini refinancing booms” can occur when rates fall rapidly. This can be an advantage for large servicers or any company looking to buy more MSRs when rates stay higher for longer.

“During times of low volume for sources, the service is a great hedge for both future volume and revenue,” Merritt said. “Mortgage companies servicing the books have been able to withstand the volatility caused by higher interest rates. There are a variety of factors servicers will consider when purchasing MSRs, such as product mix considerations, pool current rate for storage strategies, and geographic footprint.”