Mortgage rates fall to their lowest level in almost 3 years

Mortgage rates fell sharply Friday, a day after the president Donald Trump said on social media that he was asking mortgage giants Fannie Mae and Freddie Mac to buy $200 billion in mortgage bonds.

“This will lower mortgage rates, lower monthly payments and make the cost of owning a home more affordable,” he said in the Truth Social post.

The rate on a 30-year mortgage fell 22 basis points to 5.99%, matching the low on February 2, 2023, according to Mortgage News Daily.

Fannie Mae and Freddie, which are supervised by the government, do not offer home loans. They buy loans from lenders, package them into mortgage-backed securities, or MBS, and sell them to investors, thereby replenishing lenders’ funds for new loans and keeping interest rates lower and more stable for home buyers.

Buying more bonds or mortgage-backed securities lowers mortgage rates. During the first two months of the Covid pandemic, when markets were reeling, the Federal Reserve purchased $580 billion in agency MBS. She then continued to purchase more throughout the year. From March 2020 to June 2021, the Federal Reserve increased its holdings of agency MBS from $1.4 trillion to $2.3 trillion, according to the Dallas Fed.

The Federal Reserve also lowered its own interest rate to zero. This combination has brought the average rate on 30-year fixed mortgages to an all-time high, reaching just 2.75% at the start of 2021, according to Mortgage News Daily.

“How big is a $200 billion deal? It depends on a few factors, but the reaction in the MBS market is enough to tell you it’s significant,” said Matthew Graham, chief operating officer of Mortgage News Daily, who tracks rates closely and already sees them falling just on the news.

While it’s not yet clear how quickly this will begin and how long it will take, analysts are predicting where mortgage rates could end up; most estimate the drop between 25 and 50 basis points, some even lower.

“We believe that $200 billion in MBS purchases could result in a reduction of approximately 10 to 25 basis points in mortgage rates, potentially reducing the current overall 30-year mortgage rate to approximately 6.0% (6.21% currently). construction and the turnover of existing housing,” wrote the UBS analysts.

Simply put, if rates were to drop even to 5.9 percent, for someone buying a home at the median price — which is around $425,000, according to the National Association of Realtors — using a 30-year fixed mortgage with a 20 percent down payment, the monthly payment would decrease by $118. To some, that might not seem like much, but for first-time buyers on the edge of affordability, it could make a difference. They will still need to save for the down payment, which is currently the biggest hurdle for most newcomers.

Homebuilder stocks rallied on the news, but before then they were already buying into mortgage rates in the 5% range. Lately, their concerns have focused more on rising costs from tariffs and a persistent labor shortage. That said, this simple news could impact buyer demand for builders.

“I think psychologically it will help,” said Ivy Zelman, executive vice president of research and securities at Zelman, a Walker & Dunlop company. “I think today people who were looking and didn’t even know that builders were offering mortgage rate buydowns could be entering the market.”

But Zelman also points out that in the broader housing market, it’s not just the mortgage rate, but overall affordability that’s keeping buyers away. Consumers are under strain and house prices are nearly 50% higher than they were before the pandemic, ironically due to historically low mortgage rates driven by MBS purchases.

“It’s not enough to really get the market going again because we know people can’t qualify even at 4.99 percent. They can say mortgage rates are going to go below five, but we have people who still can’t qualify at 4.99 percent, so I think there’s still work to do,” Zelman said.

It could also help builders’ margins, which have declined lately due to rising costs.

“From a demand perspective, [it is] “There may be a marginal benefit from the positive psychological impact on consumers,” said John Lovallo, an analyst at UBS. “More significant is the potential ability for manufacturers to start reducing incentives to some extent, which would have a very accretive effect on gross margins.”

However, this reduction could also help current homeowners save on their monthly payments through refinancing. Rates have already been falling steadily, with the 30-year rate set lower than its recent high of 7.16% a year ago. Requests to refinance a home loan were already 133% higher year over year before this announcement, according to the Mortgage Bankers Association.

The general rule of thumb is that refinancing is only worth the cost if you can save more than 75 basis points on a mortgage rate. This would add many more potential applicants to the refinancing pool, especially those who took out their loans within the last two years. However, the vast majority of owners still have rates below 4%.