Drop in Treasury Yields Lowers Mortgage Costs

Last week witnessed a significant drop in Treasury yields, resulting in lower costs for home buyers. The average 30-year fixed mortgage rate experienced a decline from 7.86% to 7.61%, marking its most considerable one-week drop since July 2022.

Impact on Mortgage Rates

The Mortgage Bankers Association's weekly survey, released on Wednesday morning, confirmed the decrease in mortgage rates. Moreover, Freddie Mac is expected to report a similar drop when releasing its closely-watched mortgage rate survey on Thursday at noon.

Relationship Between Mortgage Rates and Treasury Yields

The decline in mortgage rates can be attributed to cooler-than-expected economic data and successful Treasury auctions. Typically, mortgage rates tend to mirror movements in the 10-year Treasury yield. However, this year has seen a wider gap between the two.

Positive Effects on Home Builder Stocks

Investors in home builder stocks were delighted by this decline. The industry has experienced a rally in recent days, initially influenced by the drop in Treasury yields and further boosted by D.R. Horton's strong earnings and guidance. The iShares U.S. Home Construction ETF (ITB), which tracks home building companies and related shares, witnessed a 1.24% increase in closure on Tuesday and remained up by 0.8% during morning trading.

Moderate Increase in Mortgage Demand

There has been a slight uptick in demand for mortgages, with the trade group's seasonally-adjusted purchase index rising by 3% from the previous week. However, it is important to note that this increase does not indicate a flood of buyers returning to the market. The index is still recovering from a 28-year low it hit last week.

Joel Kan, the trade group's deputy chief economist, mentioned that "Applications for both purchase and refinance loans were up over the week but remained at low levels." He also highlighted that the purchase index is still more than 20 percent behind last year's pace due to insufficient for-sale inventory.

In conclusion, the decline in Treasury yields has led to lower mortgage costs, providing some relief for home buyers. While there has been a modest increase in demand for mortgages, the market remains cautious. Mortgage rates continue to depend on a range of factors, including economic data and Treasury auction results.