Mortgage rates will drop below 3% by year-end as their record decline continues, Fannie May says
- Mortgage rates are set to continue their historic decline, and will likely breach 3% later this year, according to Fannie Mae.
- The 30-year fixed mortgage rate is already sitting at record lows of 3.03%, which has helped spur home purchases and refinances even amid a recession caused by the COVID-19 pandemic.
- As lender capacity constraints ease following a boom in refinance activity, Fannie Mae expects spreads between mortgage rates and the 10-year Treasury to contract.
- According to Fannie Mae, nearly 60% of all outstanding mortgage balances have at least a 0.5% incentive to refinance.
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Expect mortgage rates to extend their historic decline to below 3% by the end of this year, according to a note published by Fannie Mae on Tuesday.
In the second week of July, the 30-year fixed mortgage rate declined to 3.03%, setting a new record all-time low.
Throughout the second quarter, Treasury yields moved mostly sideways while mortgage rates declined considerably, putting pressure on the spread between the 10-year and mortgage rates, according to the note. In June, the spread measured 243 basis points, well above 2019’s average of 180 basis points, Fannie said.
Fannie forecasts the spread will continue to fall as capacity constraints lessen among lenders. “We expect mortgage rates to fall below 3.0% by the end of this year, which should continue to provide support for home purchase activity,” the note said.
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Low mortgage rates have helped fuel a boom in home purchases and refinances, as consumers look to take advantage of the lower rates. According to Fannie Mae, nearly 60% of all outstanding mortgage balances have at least a 0.5% incentive to refinance.
Because of low rates and continued social distancing measures, which have forced some households to reassess their current housing situation, Fannie Mae increased its forecast for second and third quarter home sales to 4.3 million and 5.4 million, respectively.
At the same time, Fannie Mae doesn’t expect the surge in homebuying demand to continue forever. The mortgage loan company said the COVID-19 pandemic has pulled forward a lot of demand, and expects “a pullback in existing sales over the latter half of the summer,” according to the note.
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A lot of that expected pullback has to do with inventories. According to Mae, the supply of homes available for sale lags the pace of purchase activity. “Total homes available for sale in June remained 27.4% below inventories from a year prior,” Fannie Mae said, citing data from Realtor.com.
Another component of home sales that is on the rise? Prices. Data from CoreLogic shows home prices are up 4.8% year-over-year, which marks the fastest pace of growth since November of 2018, according to the note. Taking recent data into account, Fannie Mae increased its forecast for 2020 annual home price growth to 4.4% from 0.4%.
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