Mortgage rates have remained largely stable over the past week, yet the focus shifts to the anticipated Federal Open Market Committee (FOMC) meeting. Scheduled for Wednesday at 2 p.m. ET, this meeting is expected to shed light on the future direction of interest rates. FOMC Chairman Jerome Powell will conduct a press conference at 2:30 p.m. to address any questions arising from the decision on the federal funds rate.

Market expectations point towards a 25 basis points reduction in the federal funds rate, bringing it to a range of 4.25% to 4.5%. According to the CME Group’s FedWatch tool, there is a 95% probability that this reduction will take place, following earlier cuts of 50 basis points in September and 25 basis points in November. However, despite these reductions in policy rates, mortgage rates have not shown a corresponding decline, and indications suggest this trend may persist.

Afifa Saburi, a capital markets analyst at Veterans United Home Loans, noted that “Uncertainty remains the theme and will continue to be the case as the Fed will not likely provide any new guidance when it makes its rate decision on Wednesday.” She added that while a new dot plot, outlining interest rate forecasts, will be unveiled, it is unlikely to consider forthcoming policies from the new administration. As expectations are already factored into the market, it is anticipated that mortgage rates will remain mostly unchanged in the short term.

Patricia Maguire-Feltch, managing director of consumer origination sales at Chase Home Lending, remarked on the unpredictability of market reactions following the Fed meeting. However, she highlighted a sense of optimism within the mortgage market, supported by findings from a recent Fannie Mae sentiment survey indicating a rise in homebuying demand. “If rates continue to decline, there’s a good chance we’ll see the lock-in rate soften, and homeowners and buyers alike will likely be more comfortable with taking on a higher rate,” she said.

According to data from HousingWire’s Mortgage Rates Center, the average rate for a 30-year conforming fixed-rate loan stood at 6.85%, reflecting a slight decrease of 2 basis points from the previous week, while the 15-year conforming fixed rate is now at 7.02%, increasing by 1 basis point. Notably, it is unusual for the 15-year rate to exceed that of the 30-year, a pattern that has surfaced over the past month.

Maguire-Feltch explained the factors influencing these fluctuations in interest rates, noting that “While historically the 15-year interest rates are lower than the 30-year, both respond to a variety of economic factors, such as inflation and employment numbers.” She suggested that daily changes in these economic indicators may have contributed to the recent rise in the 15-year rate, although this situation is not expected to be sustained.

Further forecasts from First American senior economist Sam Williamson indicate that the FOMC may express a less aggressive stance on interest rate cuts for 2025. Williamson noted that “Several committee members have suggested that slowing the pace of rate cuts is appropriate, given the recent outperformance of the U.S. economy and stalled progress on bringing down inflation.” He pointed out that there is an 84% market-implied probability that a pause in cuts may occur as early as January.

Examining refinancing opportunities, Maguire-Feltch highlighted that current rates do not need to experience significant drops to stimulate refinancing interest. Nearly 300,000 borrowers seized the opportunity to refinance when rates fell to the low-6% range in September and October. The refinancing landscape is particularly favourable for borrowers with larger loan balances, requiring less incentive compared to those with smaller loans.

“If rates drop below 6%, roughly 4.7 million consumers would be eligible for a refinance opportunity, leading to increased activity in the refinance market,” she stated, suggesting a boost in demand for lenders.

Maguire-Feltch went on to address the role of artificial intelligence (AI) in the mortgage sector, forecasting that “AI will influence almost every aspect of mortgage lending.” She anticipates that the transition away from paper-based processes will streamline loan processing, potentially mitigating the impact of elevated interest rates. “AI will be leveraged more in 2025 to analyse market trends and enable lenders to offer resources that align with the current market,” she added, indicating that the full effects of these technological advancements may take a few years to materialise.

Source: Noah Wire Services