After the Fed's most recent rise and a bad GDP report, mortgage rates dramatically decreased

Mortgage rates sharply declined just one day after the Federal Reserve increased its target rate.

According to Mortgage News Daily, the average rate on the popular 30-year fixed mortgage decreased to 5.22 percent on Thursday from 5.54 percent on Wednesday, when the Fed announced its most recent rate hike. On Friday, the rate dropped even more, to 5.13 percent.

The 30-year fixed rate barely changed in the days leading up to the Fed meeting earlier this week, although it had been gradually declining from its most recent peak in mid-June, when it briefly exceeded 6 percent.

The U.S. economy shrank for the second consecutive quarter, according to the Bureau of Economic Analysis' gross domestic product report, which was released just before the drop on Thursday. That is a recognized indicator of a recession. According to the advance estimate, annualized GDP decreased by 0.9 percent during the period. Dow Jones polled economists, who predicted 0.3 percent growth.

Following the announcement, investors flocked to the relatively safe haven of the bond market, which led to a decline in yields. The yield on the 10-year U.S. Treasury bond roughly predicts mortgage rates.

Matthew Graham, COO of Mortgage News Daily, declared that "this is an extraordinarily quick drop." "What's maybe even more intriguing (and unusual) is that mortgage rates have fallen more quickly than U.S. Treasury yields. The usual situation is that investors gravitate for the simplest, riskiest bonds initially.

According to Graham, the overall change in rates over the previous month has made it so that investors would much rather keep mortgage debt with lower interest rates.

"In a sense, mortgage investors are attempting to get an advantage. If those loans refinance too soon while they are still being held at a higher rate, they will lose money, he continued.

The question at hand is whether the market has entered a new range or if the current level of interest rates will hold.

Graham cautioned that if rates changed course, volatility might increase significantly in the opposite direction. He added that if economic data remained depressing and inflation eased, mortgage rates might fall much further.

Lower interest rates already seem to be having a small effect on prospective homebuyers. As rates dropped from their previous highs, real estate company Redfin recently reported witnessing a modest increase in searches and home tours over the past month.

As demand has leveled off, the housing market "looks to be settling into an equilibrium," according to Redfin's chief economist, Daryl Fairweather. Inflation and Fed rate hikes may still come as a surprise, but for the time being, a decrease in mortgage rates has given purchasers some respite from last month's rate spike.

However, the rise in buyer interest hasn't resulted in more sales or new contracts. Slowly more homes are coming on the market, and more sellers are reportedly lowering their asking prices.

This article was contributed on Aug 02 2022