Mortgage rates took a steep dive last week in the biggest one-week drop since September 2021. The average 30-year fixed mortgage rate decreased to 7.61% from 7.86% the week prior, according to the Mortgage Bankers Association (MBA).
This plunge in rates over the course of just one week sparked a 2.5% increase in total mortgage loan application volume. It was the first uptick in demand after four straight weeks of declines.
The drop in mortgage rates was driven by positive economic news. The Federal Reserve struck a dovish tone signaling slower future rate hikes. This was followed by monthly jobs data that came in under expectations pointing to cooling inflation.
What does the rate plunge mean for mortgage borrowers? Here are the key takeaways:
Refinancing Demand Rises But Still Lags 2021
The dip in rates led to a 2% bump in refinance application volume last week. This marks a turnaround after refinancing demand fell to a 22-year low in October when rates topped 7%.
But refinancing is still 7% lower than the same week last year. In 2021, rates hovered near 3%, fueling a refinancing boom. Today, most homeowners already refinanced at those historically low rates.
For context, 63% of mortgage borrowers are paying rates under 4%, according to Black Knight data. There is little incentive for these borrowers to refinance at today’s higher rates.
The bottom line is that lower rates are inviting more refinancing but volumes are still a fraction of the 2021 frenzy. Only borrowers with rates well above 7% stand to meaningfully benefit from a refi now.
Homebuying Demand Rebounds But Remains Suppressed
The positive rate movement also drove a 3% weekly gain in purchase mortgage applications. This suggests some home buyers are jumping at the chance to lock lower rates.
But purchase demand remains sharply lower than last year, down 20% from the same week in 2021. Sky high home prices are outweighing the lure of lower rates for many prospective buyers.
The median home sales price in September was $384,800, up 8.4% from 2021 according to the National Association of Realtors. Price gains are outpacing the rate relief.
Moreover, today’s rates are still dramatically higher than the sub-3% levels seen last year. So while lower rates offer savings, overall affordability remains constrained for buyers.
What Drove the Rate Plunge?
Rates started retreating after the Fed announced its latest 0.75% rate hike on November 2. Investors took an optimistic signal from the Fed indicating it may slow the pace of future hikes due to easing inflation.
The optimism was cemented on November 4 when the October jobs report showed the labor market is starting to cool. Employers added 261,000 jobs last month, below estimates of 300,000.
Slower job growth reduces inflation pressures, reinforcing the case for the Fed to temper rate hikes. This positive news for the economy caused mortgage rates to unravel.
What’s Ahead for Mortgage Rates?
Mortgage rates started this week slightly higher but remain volatile. The MBA noted there are fewer major economic events on the calendar this week that could substantially sway rates.
But Fed speakers may still influence rate expectations. Any renewed hawkish signals could nudge rates higher again. Rates are also very sensitive to inflation data hints.
For now, the overall trend for mortgage rates is bouncing within a range but remains comparatively high historically. Barring an unforeseen shock, major swings in either direction appear unlikely in the near term.