Positive economic data at the start of December was quickly sidetracked by a much stronger-than-expected jobs report, leaving investors wondering about what course the Federal Open Market Committee will choose to take at its meeting Dec. 13 and 14. Previously, investors were bullish on the FOMC opting for a 50-basis point rate hike versus a 5th-straight 75-basis point hike, but the strong labor data created some gray area. Because of that, investors have concerns that the Fed's quantitative tightening measures will be prolonged and more hawkish which might push the United States into a true recession. The U.S. economy fell into a technical recession after two consecutive quarters of GDP growth earlier this year. 

The concern spurred volatility in the bond market with the 10-year Treasury note yield decreasing mid-week before climbing again on Thursday, finally settling in at 3.47% in early Friday morning trading. The 10- and 2-year notes remain inverted by nearly a full point spread. The notes have been inverted since June of this year. Every recession on record has been preceded by a yield curve inversion.

The silver lining for the mortgage industry is falling 10-year Treasury note yields typically result in lower mortgage rates. Freddie Mac's 30-year fixed-rate mortgage average fell for a fourth consecutive week, coming in at 6.33%. Freddie Mac's report says the decreases are "due to increasing concerns over lackluster economic growth. Over the last four weeks, mortgage rates have declined three quarters of a point, the largest decline since 2008. While the decline in rates has been large, homebuyer sentiment remains low with no major positive reaction in purchase demand to these lower rates."

Demand continues to wane overall with refinances down 86% from a year ago and purchases down 40% from a year ago, according to the Mortgage Bankers Association weekly survey. "Mortgage applications decreased 2 percent compared to the Thanksgiving holiday-adjusted results from the previous week, even as mortgage rates continued to trend lower. Rates decreased for most loan products, with the 30-year fixed declining 8 basis points to 6.41 percent after reaching 7.16 percent in October," said Joel Kan, MBA's Vice President and Deputy Chief Economist. "The 30-year fixed rate was 73 basis points lower than a month ago – but was still more than three percentage points higher than in December 2021. Additionally, the pace of refinancing remained around 80 percent lower than a year ago."

Kan also noted a really important data point in the release saying, "The average loan size for purchase applications decreased to $387,300 – its lowest level since January 2021." Right now, home prices are cooling at a rapid rate (as we discussed in recent articles showcasing the CaseShiller home price index) but still are not low enough to offset the high mortgage interest rate sticker shock many homebuyers are feeling. 

Furthermore, inventory is still a big issue. The huge wave of refinances in 2020 and 2021 means those homeowners are likely very unwilling to give up their sub-3% mortgage interest rate. New home construction is also struggling to keep up because of continued supply chain and labor issues along with weakened demand due to high rates and cost. Essentially we are in a bit of a log jam situation until rates and home prices move low enough to stoke stronger demand and we can return to a more stable, "normal" housing market.