After some less-than-stellar inflation reports in January and February, investors were hoping that the more favorable trend for price pressures would return for March. Unfortunately, this wasn't the case, and put to rest the argument that the increase in inflation to start the year was the result of what was termed to be "residual seasonality" effects.
As you might expect, the less comforting news regarding inflation caused a considerable rise in market-based interest rates. The influential yield on the 10-Year Treasury note has returned to levels last seen in November, a time when mortgage rates were just coming off their peaks and optimism regarding rate cuts for 2024 were taking hold. That's no longer the case; mortgage rates have firmed recently and are poised to go higher still.
While that's bad news for potential homebuyers, the reality is that things could actually be worse. Over the last few months, the differential between the yield on the 10-year Treasury and the average rate for conforming 30-year fixed-rate mortgages has narrowed appreciably compared to where it was at times last year. In turn, this means the sizable increase in Treasury yields over the last few weeks won't lift mortgage rates as high as similar selloffs did at those times. Although it doesn't change the fact that rates are high and heading higher, it's at least a relative victory for borrowers.
Applications for mortgage credit managed a 0.1% increase in the week ending April 5, according to the Mortgage Bankers Association. Requests for funds to purchase homes sank by 4.7%, so the spring homebuying season continues its cold pace. However, applications to refinance existing mortgages leapt 9.9% higher, and this despite less favorable mortgage rates in the market. Perhaps some homeowners looking to do cash-out refinances have come to the realization that lower mortgage rates aren't coming very soon and waiting for them risks delaying plans for things like home renovations, and so jumped into the market.
We'll start getting a more detailed look at the start of the spring housing market next week, when updates from the National Association of Home Builders comes, followed by the March report on housing construction and permits for future projects. Later in the week, we'll also see the March update for sales of existing homes. Given the typical time lag between the time a contract to purchase is signed and when the closing takes place, the March report will be reflective of buyer demand in late January and much of February, when mortgage rates were again firming up. At least according to the National Association of Realtors Pending Home Sales Index for February, a modest improvement in March sales should be expected; however, there's no way to know how much of the 1.6% increase in sales agreements From February made it all the way through to closing in March, so the actual sales number for March may be fairly flat.
One thing is certain in that the mortgage rate situation isn't going to get any better this week. The selloff in Treasuries and bonds that began more than a week ago didn't lift mortgage rates as much as we expected this week, but if anything, the rise in yields intensified somewhat last week. Mortgage rates cannot resist this pressure indefinitely even if spreads over Treasuries are thinning. Concerns about new attacks in the middle east saw a rush to safety on Friday, reversing this week's run-up in yields a little on Friday. That said, with the 10-year Treasury yield ending last week at about 4.5%, it's hard not to expect the average offered rate for a conforming 30-year FRM to land close to 7%, not that a 12-basis point increase from last week's platform is all that much of a leap.