On Wednesday, Goldman Sachs (NYSE:GS) revised its forecast for 30-year conforming mortgage rates, lowering the expectation to 6% for the year 2024 and 6.05% for 2025. This revision comes down from its previous forecast of 6.5% and 6.1%, respectively. The adjustment follows the Federal Reserve's decision to cut rates by 50 basis points on September 18, which led to a reduction in the 10-year US Treasury yield forecast for the end of 2024 to 3.85% from 4.25%.
The firm's analysts suggest that the revised mortgage rate forecasts imply there is limited room for further declines, as the current Freddie Mac Primary Mortgage Market Survey rate stands at 6.08%. The expectation is that the forward path of the base yield component will primarily influence the mortgage rates. The analysts also anticipate that a gradual build-up of positive growth data and a data-dependent Fed, coupled with limited scope for fiscal consolidation, will eventually lead to a market repricing of the terminal Fed Funds rate higher, lifting intermediate yields.
Despite the potential for higher yields, tightening in the spread components, including the mortgage basis and primary-secondary spreads, could offset this increase. Goldman Sachs expects the mortgage basis and primary-secondary spreads to tighten by year-end 2024 and 2025. The mortgage basis is predicted to narrow to 120 basis points by the end of 2024 and 111 basis points by the end of 2025 from the current 129 basis points. The primary-secondary spreads are expected to tighten by 10 basis points through the end of this year and by an additional 2 basis points the following year.
The firm also notes that while lower mortgage rates have improved its Housing Affordability Index by 17% from historical lows last October, the index is still about 20% below the equilibrium level of 100. According to Goldman Sachs, the baseline forecasts for mortgage rates, home prices, and income growth indicate that the recovery of housing affordability will be gradual, barring any significant improvements on the supply side.
In other recent news, the Secure Overnight Financing Rate (SOFR) recently experienced its largest single-day increase since the COVID-19 pandemic, coinciding with a substantial rise in SOFR volumes. This spike in funding rates was accompanied by an unusual pattern of Federal Reserve repo facility usage, indicating a tightening in short-term funding markets. In the same vein, Morgan Stanley (NYSE:MS) and Wells Fargo (NYSE:WFC) have analyzed a substantial 50 basis point rate cut by the Federal Reserve, predicting further reductions despite a healthy economy and strong labor market.
Simultaneously, escalating tensions in the Middle East have prompted a shift towards safe-haven assets, with potential implications for oil prices and market stability, as monitored by Tellimer and LPL Financial (NASDAQ:LPLA). Investors are also awaiting a critical labor market report following a series of weaker-than-expected job increases.
In international developments, Morgan Stanley anticipates further rate cuts by the Federal Reserve and the European Central Bank, while expecting an increase by the Bank of Japan. The firm also predicts rate cuts by the Bank of England, citing a mix of softening economic data and stable inflation.
InvestingPro Insights
To complement the analysis of mortgage rates and housing affordability, let's examine some key metrics for the SPDR S&P 500 ETF Trust (SPY (NYSE:SPY)), which serves as a broad indicator of the U.S. stock market performance.
According to InvestingPro data, SPY has demonstrated strong performance with a 34.87% price total return over the past year and is currently trading near its 52-week high, at 98.83% of that peak. This robust performance aligns with the overall market optimism despite concerns about interest rates and housing affordability.
InvestingPro Tips highlight that SPY has raised its dividend for 14 consecutive years and maintained dividend payments for 32 consecutive years, indicating stability and consistent returns for investors. This could be particularly appealing in the context of a potentially challenging housing market.
The ETF's current dividend yield stands at 1.23%, which, while modest, provides an additional income stream for investors who may be hesitant to enter the housing market due to affordability concerns.
It's worth noting that InvestingPro offers 5 additional tips for SPY, providing investors with a more comprehensive analysis to navigate the current economic landscape.
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