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Mortgage rates are falling sharply after a negative GDP report and the latest Fed hike

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A sign hangs outside a home for sale on July 14, 2022 in San Francisco, California. The number of homes listed for sale in the US rose 2 percent in June for the first time since 2019.

Justin Sullivan | Getty Images

Just one day after the Federal Reserve raised the benchmark rate, mortgage rates fell sharply.

The average rate on the popular 30-year fixed mortgage fell to 5.22% on Thursday from 5.54% on Wednesday, when the Fed announced its latest rate hike, according to Mortgage news daily.

Rates were little changed in the days leading up to the Fed meeting earlier this week, but they have slowly eased from their most recent high in mid-June, when the 30-year fixed rate briefly topped 6%.

Thursday’s drop also followed a gross domestic product report from the Bureau of Economic Analysis that showed the U.S. economy shrank for the second straight quarter. This is a widely recognized recession signal. According to the data, GDP decreased by 0.9% year-on-year during this period advance estimate. Economists polled by Dow Jones had expected a 0.3% rise.

After the news, investors rushed to the relative safety of the bond market, sending yields down. Mortgage rates are marginally in line with the 10-year US Treasury yield.

“It’s an exceptionally fast drop!” wrote Matthew Graham, Chief Operating Officer of Mortgage News Daily. “Perhaps even more interesting (and unusual) is the fact that mortgage rates are falling faster than US Treasury yields. As a rule, the opposite happens, as investors first rush into the simplest, risk-free bonds.”

Graham said the wide swing in rates over the past month has created a situation where investors prefer to hold mortgages with lower rates.

“In a sense, mortgage investors are trying to get ahead of the game. If they hold mortgages at a higher rate, they will lose money if they refinance those loans too quickly,” he added.

The question now is whether the market is in a new range and rates settle where they are now.

“If rates reverse course, the volatility could be as great as the other direction,” Graham warned. He also noted that mortgage rates could drop even lower if economic data remains bleak and inflation eases.

Lower rates already seem to be having a small impact on potential home buyers. Real estate brokerage services Krasnoperka just reported that he’s seen a slight uptick in searches and home tours over the past month as rates have fallen to recent highs.

“The housing market appears to have stabilized now that demand has leveled off,” Redfin Chief Economist Darryl Fairweather said in a release. “We may still have some surprises in store when it comes to inflation and the Fed’s rate hikes, but for now, the easing of mortgage rates has brought some relief to buyers who were suffering from last month’s rate spike.”

Increased buyer interest, however, did not lead to new contracts or sales. The supply of homes for sale is rising slowly, and there are reports that more sellers are lowering their asking prices.

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