Homeowners scrambled to refinance last week as mortgage rates dropped to the lowest level in four months, with homebuyer demand also up by double digits from a year ago, according to a weekly survey of lenders by the Mortgage Bankers Association.
Mortgage rates have more room to come down in the months ahead, with Federal Reserve policymakers now expected to respond to deteriorating jobs numbers by slashing short-term interest rates at their three remaining meetings this year.
The MBA’s Weekly Mortgage Applications Survey showed requests to refinance jumped 23 percent last week compared to the week before. After adjusting for seasonal factors, requests for purchase loans were only up 1 percent week-over-week, but demand was up 17 percent from a year ago.
Joel Kan
Requests to refinance accounted for 46.5 percent of all mortgage applications during the week ending Aug. 8 — the strongest demand for refis since April, MBA Deputy Chief Economist Joel Kan said in a statement.
“However, lower rates were not enough to entice more homebuyers back into the market,” Kan said of the lackluster week-over-week growth in purchase loan applications.
At 6.60 percent Tuesday, rates on 30-year fixed-rate conforming loans were down 32 basis points from May 23 — nearly a third of a percentage point, according to rate lock data tracked by Optimal Blue. A basis point is one hundredth of a percentage point.
Mortgage rates are in retreat
Rates on 30-year fixed-rate conforming mortgages had dropped to a 2025 low of 6.48 percent on April 4 before climbing back to nearly 7 percent in late May as investors who fund most home loans weighed the potential for tariffs to rekindle inflation.
The latest inflation numbers released Tuesday showed tariffs driving up prices of some goods and services in July, but not as quickly as expected. The concern for Fed policymakers is now shifting to the other half of the central bank’s dual mandate: to maximize employment.
A surprise Aug. 1 jobs report showing payroll growth dropping to the slowest rate since December 2020 prompted President Trump to fire Bureau of Labor Statistics Commissioner Erika McEntarfer, accusing the economist of having manipulated the payroll numbers “for political purposes.”
But the report — which also showed the unemployment rate rose to 4.2 percent as the ranks of the unemployed grew to 7.24 million — means the Fed is now all but certain to do what Trump has been pressuring it to do for months: lower rates.
Two Fed policymakers who wanted to cut rates in July — Trump appointees Michelle Bowman and Christopher Waller — have continued to make their case.
Michelle Bowman
Bowman said in a speech Saturday that she expects the Fed to cut rates three times this year, as “I see the latest news on economic growth, the labor market, and inflation as consistent with greater risks to the employment side of our dual mandate.”
Waller said on Aug. 1 that if the Fed wants to take a neutral stance, short-term interest rates should be 1.25 to 1.5 percentage points lower than they are today.
Christopher Waller
Waller favors cutting rates now, because, he said, “while the labor market looks fine on the surface, once we account for expected data revisions, private-sector payroll growth is near stall speed, and other data suggest that the downside risks to the labor market have increased.”
“With underlying inflation near target and the upside risks to inflation limited, we should not wait until the labor market deteriorates before we cut the policy rate.”
But Kansas City Federal Reserve President Jeffrey Schmid warned Tuesday that the Fed should remain cautious about cutting rates, saying inflation remains too high and that July’s 4.2 percent unemployment rate is “very close to what many economic forecasters would estimate as the full employment rate.”
Jeffrey Schmid
“While it is true that payroll growth was weak over the summer, a broader set of indicators suggest a labor market that is in balance,” Schmid said. “The unemployment rate remains low, wage growth remains solid, and the ratio of reported job vacancies to available unemployed workers is about one-to-one, a matching that suggests a labor market close to balance.”
Investors who fund home loans now see a September rate cut as a given, and that the odds for three rate cuts are better than even.
On July 31, futures markets tracked by the CME FedWatch Tool showed investors saw only a 38 percent chance of a Sept. 17 rate cut. The odds of a September rate cut rose to 81 percent on Aug. 1 following the weak jobs report, and are now at 99.9 percent following Tuesday’s benign Consumer Price Index (CPI) inflation report.
Futures markets on Wednesday were pricing in a 60 percent chance that the Fed will cut rates by 3/4 of a percentage point at its final three meetings of the year, up from 27 percent on July 11.
That’s a view shared by forecasters at Pantheon Macroeconomics, who expect three 25-basis point rate cuts this year followed by two more in March and June 2026. That would bring the short-term federal funds rate down by a total of 1.25 percentage points over the next 10 months.
But forecasters at Pantheon expect yields on 10-year Treasury notes, which are a reliable barometer for mortgage rates, will only come down by about half as much (68 basis points) by next June.
Economists at Fannie Mae forecast in July that rates on 30-year fixed-rate mortgages could drop to 6.4 percent by the end of the year, and average 6 percent during the second half of 2026. The MBA has issued a more cautious forecast, predicting that mortgage rates would remain in the high sixes this year before falling to 6.4 percent by Q4 2026.
The Fed doesn’t have direct control over mortgage rates, which went up when the central bank cut short-term rates last year.
But mortgage rates will come down if investors in mortgage-backed securities (MBS) that fund most home loans agree that the economy is losing steam and that the Fed will have no choice but to continue cutting rates.
Wild cards that add to the uncertainty over where mortgage rates are headed next include the Trump administration’s goal to take Fannie Mae and Freddie Mac public again this year — confirmed by Trump himself over the weekend — and whether economists and investors will lose trust in reports issued by the Bureau of Labor Statistics under the direction of controversial Trump nominee E.J. Antoni.
Tuesday’s CPI report showed annual inflation moving away from the Fed’s 2 percent target for the third month in a row in July, rising to 2.7 percent.
Inflation moving away from Fed’s 2 percent goal
Core CPI, which excludes volatile food and energy costs, moved up for the second month in a row, to 3.05 percent.
But the month-over-month rise in CPI and core CPI were in line with economists’ expectations, and the annual increase in CPI was slightly less than forecast.
“July’s CPI report was notable for the slowing in pass-through from the tariffs to goods prices, but that will prove temporary,” forecasters at Pantheon Macroeconomics predicted in their Aug. 13 U.S. Economic Monitor.
Annualized tariff revenues in July were up $252 billion from a year ago, which equates to 3.9 percent of consumer spending on goods, they noted.
Relatively weak demand has made some retailers unwilling to hike prices, “but it is unlikely that all the tariffs can be absorbed indefinitely,” Pantheon economists Samuel Tombs and Oliver Allen wrote.
So far this year, the core goods CPI has risen by just 0.8 percent, “leaving ample scope for price rises to regain momentum soon.”
Tombs and Allen see core CPI inflation peaking at 3.5 percent at the end of this year. They expect the Fed’s preferred gauge of inflation, the personal consumption expenditures (PCE) price index, will also continue to rise, peaking at 3.25 percent.
But because it takes time for changes in monetary policy to take effect, Fed policymakers are expected to cut rates even as inflation continues to rise in order to keep unemployment in check.
Many of the components of the PCE calculation are unpredictable, but “July’s data are unlikely to dissuade [Fed policymakers] from easing policy next month to support the weakening labor market,” Pantheon forecasters said.
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Email Matt Carter