Mortgage rates experienced a significant decline, following President Donald Trump’s announcement on social media that he is directing mortgage giants Fannie Mae and Freddie Mac to acquire $200 billion in mortgage bonds. “This will drive mortgage rates down, monthly payments down, and make the cost of owning a home more affordable,” he stated in the Truth Social post. The rate on a 30-year mortgage decreased by 22 basis points to 5.99%, aligning with the low observed on February 2, 2023, as reported. Fannie Mae and Freddie, currently under government conservatorship, do not engage in the origination of home loans. They acquire loans from lenders, aggregate them into mortgage-backed securities, and market them to investors — consequently replenishing lender capital for new loans and maintaining lower and more stable interest rates for homebuyers.

Acquiring additional mortgage-backed bonds or securities does indeed lead to a reduction in mortgage rates. During the initial two months of the Covid pandemic, as markets experienced significant turmoil, the Federal Reserve acquired $580 billion in agency mortgage-backed securities. The purchasing activity persisted throughout the year. Between March 2020 and June 2021, the Federal Reserve expanded its agency MBS holdings from $1.4 trillion to $2.3 trillion, as reported. The Federal Reserve has also reduced its lending rate to zero. The amalgamation resulted in the average rate on the 30-year fixed mortgage reaching unprecedented lows, registering at merely 2.75% at the commencement of 2021, as reported. “How significant is $200 billion?” This depends on several factors, yet the response in the MBS market indicates its significance,” stated Matthew Graham. Although the timeline for the onset and duration remains uncertain, analysts are forecasting potential outcomes for mortgage rates; the majority anticipate a decline in the range of 25 to 50 basis points, with some projections suggesting even lower figures. “We believe that 200bn of MBS purchases could drive a ~10-25bps reduction in mortgage rates, potentially reducing the current 30-year headline mortgage rate to roughly 6.0% (current 6.21%). Despite remaining high compared to the average outstanding mortgage rate of 4.4% and the 3.25% levels observed in January 2022, this decline could potentially enhance demand for new construction as well as facilitate turnover in the existing home market, analysts at UBS noted.

In straightforward terms, should interest rates decline to 5.9%, an individual purchasing the median-priced home, approximately valued at $425,000 as reported by the National Association of Realtors, would experience a reduction of $118 in their monthly payment when utilizing a 30-year fixed mortgage with a 20% down payment. For some, this may not appear substantial; however, for first-time buyers teetering on the brink of affordability, it could prove significant. Nonetheless, they would still need to accumulate savings for the down payment, which presently represents the most significant obstacle for many first-time buyers. Homebuilder stocks experienced a rally following the news, although they had already been reducing mortgage rates significantly, bringing them down into the 5% range prior to this development. Recent concerns have increasingly centered on rising costs attributed to tariffs and an ongoing labor shortage. Nonetheless, the mere announcement of this could influence buyer demand for the builders. “I think psychologically it will help,” stated Ivy Zelman. “It appears that individuals who have been observing the market, perhaps unaware that builders were providing mortgage rate buydowns, may now consider entering the market.” However, Zelman emphasizes that in the wider housing market, it is not solely the mortgage rate that is influencing buyer behavior, but rather the overall affordability that is preventing potential buyers from entering the market. Consumers are experiencing financial strain, with home prices now approximately 50% elevated compared to pre-pandemic levels, a situation ironically influenced by the historically low mortgage rates resulting from MBS purchases. “This is insufficient to genuinely stimulate the market, as we understand that individuals are unable to qualify even at 4.99%.”

“They can assert that mortgage rates will decline to below 5, yet we have individuals who still cannot qualify at 4.99%. Therefore, I believe there is additional work to be accomplished,” Zelman stated. This may also assist in improving builder margins, which have been contracting recently due to elevated costs. “From a demand perspective, [it is] perhaps a marginal benefit stemming from the positive psychological impact on consumers,” stated John Lovallo. “A larger scale presents the potential for builders to start reducing incentives to a certain degree, which would significantly enhance gross margins.” The decline, however, may also enable existing homeowners to reduce their monthly payments via refinancing. Rates have been declining consistently, with the 30-year fixed rate decreasing from its recent peak of 7.16% one year ago. According to the Mortgage Bankers Association, applications to refinance a home loan had already increased by 133% year over year prior to this announcement. The prevailing guideline suggests that refinancing is financially justifiable only if it results in savings exceeding 75 basis points on the mortgage rate. This would significantly expand the pool of potential candidates for refinancing, particularly for those who secured their loans in the past two years. The overwhelming proportion of homeowners, nonetheless, continue to enjoy rates under 4%.