“While the Fed did make the planned cuts, mortgage rates are more impacted by the 10-year Treasury yield, which has led to rates ticking up even as the Fed has cut their rates,” Merritt told HousingWire in an email.
In commentary released last week, Bank of America analysts labeled the December jobs report as “gangbusters” as nonfarm payrolls jumped by 256,000 positions, well above the six-month average growth rate of 165,000. They also noted the revised forecast by Fed officials which “indicated that inflation risks were skewed to the upside.”
Inflation has been reined in significantly over the past two years but still rose at a 2.7% annual clip in November, according to the Consumer Price Index. The CPI report for December is set to be released Wednesday.
“Given a resilient labor market, we now think the Fed cutting cycle is over,” Bank of America analysts wrote. “Economic activity is robust. We see little reason for additional easing.”
Interest rate traders are also placing their bets on rates staying the same. According to the CME Group’s FedWatch tool, 97% believe the federal funds rate will remain at a range of 4.25% to 4.5% when the Federal Open Market Committee (FOMC) wraps up its next meeting on Jan. 29.
HousingWire’s 2025 Housing Market Forecast calls for “continued slight easing in mortgage rates to a range of 5.75% to 7.25% during the year. This range implies that rates are not forecasted to dramatically deteriorate, and there’s no sub-5% rates in sight. The range accommodates variability for the ups and downs of economic news during the year.”
Bank of America also tackled the question of what it would take for the Fed to begin raising rates again.
Analysts said their “base case has the Fed on hold,” with cuts of 30 to 35 bps still being priced into the market by the end of the year. But even though “the Fed still thinks rates are restrictive,” hikes could be possible if core inflation as measured by the Personal Consumption Expenditures (PCE) index exceeds 3% year over year, or if “long-term inflation expectations become unanchored,” they wrote. PCE growth stood at 2.4% in November.
Despite the generally gloomy housing market conditions, consumers appear more optimistic than they were a year ago. Fannie Mae’s Home Purchase Sentiment Index for December showed that 42% of respondents expect mortgage rates to go down in the next 12 months, up from 31% at the end of 2023. And while only 20% of respondents say it’s a good time to buy a home, that’s up from an all-time low mark of 14% one year ago.
Merritt thinks mortgage lenders could take some comfort in that trend.
“The longer rates stay elevated, the more comfortable homebuyers will be with them — life continues to happen and homes have to be bought and sold,” he said. “If you look back historically, 7% is still a good rate. It just does not compare well to the recent historic lows we have seen since the financial crisis. It would take another major economic event to get rates back below 5%.”
BOK Financial is the 55th-largest mortgage servicer in the country with $24.8 billion in owned mortgage servicing rights (MSRs) as of third-quarter 2024, according to Inside Mortgage Finance estimates. Merritt said that many servicers are in a position to capitalize on their existing book of business if rates drop and borrowers look to refinance in greater numbers, just as they did in the fall of 2024.
He believes that “mini refinance booms” are likely to occur whenever rates drop quickly. That can be an advantage for large servicers — or any company looking to buy more MSRs — when rates stay higher for longer.
“During times of lower volume for originations, servicing is a great hedge for both future volume and for revenue,” Merritt said. “Mortgage companies that have servicing books have been able to weather the volatility that the higher rates have caused. There are a variety of factors that servicers will look at when purchasing MSRs such as product mix considerations, current rate of the pool for retention strategies, and geographic footprint.”
