It was a volatile week for mortgage rates with stronger than expected housing data, big news from the Fed, and a postponement of the new fee on refinances. The net effect was roughly offsetting, however, and rates ended the week little changed.
The swift rebound in housing market activity from the weakness due to the shutdown of much of the economy to slow the spread of the coronavirus has continued. Like last week’s surprisingly strong existing home sales report, Tuesday’s new home sales data far surpassed expectations. In July, new home sales rose 14% from June to the best level since 2006 and were 36% higher than a year ago.
In a highly anticipated speech on Thursday, Fed Chair Powell outlined a change in policy in which the Fed will be more willing to tolerate higher inflation to help support the labor market. The new policy is described as “average inflation targeting,” which means that inflation will be allowed to run above the Fed’s 2.0% goal “for some time” following periods when it has run below that target. As a result of the change, it is expected that the Fed will raise the federal funds rate at a slower pace than in the past when labor market conditions improve. Although this was a major announcement, it had been telegraphed to investors for weeks, so its impact on mortgage rates was minimal.
One reason for the shift in Fed policy is that the reduced economic activity resulting from the pandemic has caused a decline in inflation, which has helped keep mortgage rates low. In July, the core PCE price index was just 1.3% higher than a year ago, up from an annual rate of increase of 1.1% last month. Core PCE is the inflation indicator favored by the Fed.
On August 12, the Federal Housing Finance Agency (FHFA) unexpectedly announced that a new refinance fee of 0.5% will be assessed for cash-out and no-cash-out refinances sold to Fannie Mae and Freddie Mac beginning September 1. After severe opposition swiftly emerged from many members of the mortgage industry, the FHFA announced on Wednesday that the implementation date for the new 0.5% fee will be postponed from September 1 to December 1 and that refinance loans with loan balances below $125,000 will be exempted. This was welcome news for consumers in the market for refinancing.
Looking ahead, investors will continue watching for news about medical advances, government stimulus programs, Fed monetary policy changes, and plans for reopening the economy. Beyond that, the monthly Employment report will come out on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. In addition, the ISM national manufacturing index will be released on Tuesday and the ISM national services index on Thursday.
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