Bank of America: Path to 5% mortgage rates if 'the Fed does MBS quantitative easing'

Today’s ResiClub letter is brought to you by Lennar Investor Marketplace!

Unlock smarter investing with the Lennar Investor Marketplace, which brings you brand-new construction homes across 90+ markets nationwide, each of which comes rental-ready and optimized for your portfolio.

Lennar Investor Marketplace is a completely free online platform that brings together curated new Lennar homes for sale accompanied by a 360-degree view of each home’s potential. Each listing is paired with institutional-quality data, including rental comps, demographics, school scores and more.

From initial evaluation to offer submission, the Marketplace simplifies the investment process with end-to-end support. Investors can access pre-negotiated financing, property management, insurance and title services with Lennar and its partners—ensuring competitive rates and a seamless transaction from research to closing.

Bank of America: How to get back down to a 5.0% mortgage rate

Last week, the average 30-year fixed mortgage rate tracked by Freddie Mac hit a calendar-year low of 6.35%. It’s likely this week’s reading could come in even lower given that the daily rate reported by Mortgage News Daily was 6.13% today.*

In recent months, the average 30-year fixed mortgage rate has edged down. Part of the decline can be attributed to a continued gradual compression of the “mortgage spread”**, as some investors slowly regain their appetite for mortgage-backed securities (MBS) and help fill the void left by the Federal Reserve when it stopped buying MBS in spring 2022.

The other factor putting downward pressure on mortgage rates—and long-term yields—has been a recent stretch of softer-than-expected labor market data and financial market’s growing expectation that the Fed will shift policy from restrictive to neutral.

Even though the Fed’s expected short-term rate cuts haven’t happened yet (a 25 bps Fed cut is expected tomorrow), analysts at Bank of America believe that most of the 2025 decline we’ll see in mortgage rates is already baked in. In fact, in a forecast Bank of America published on Tuesday, they project that the average 30-year fixed mortgage rate will likely end 2025 at 6.25%.

What would it take to get the average 30-year fixed mortgage rate to 5.0%?

When Bank of America says “MBS quantitative easing,” they mean the Federal Reserve going out and buying mortgage-backed securities—something it has done in recent decades when the economy and labor market have weakened.

Long-term yields—such as the 10-year Treasury yield and the average 30-year fixed mortgage rate—are determined by demand (or lack of demand) for the underlying bond. Yields move inversely to bond prices. If demand for long-term bonds rises, bond prices go up and yields/mortgage rates fall. If bond demand falls, bond prices drop and yields/mortgage rates rise.

Hypothetically, if the unemployment rate were to spike and the economy weakened, financial markets could respond with a flight to safety—driving up demand for Treasuries, which would push bond prices higher and yields/mortgage rates lower. At the same time, the Fed could respond with emergency cuts to the federal funds rate and, if the downturn were severe enough, potentially resume purchases of mortgage-backed securities (MBS), adding further downward pressure on mortgage rates.

Big picture: IF the average 30-year fixed mortgage rate falls to 5.0% anytime soon, Bank of America believes it would likely be because the economy has taken a negative turn—or perhaps because the central bank adopted a new policy approach—and resumed buying mortgage-backed securities.

*The average 30-year fixed mortgage rate doesn’t tell potential borrowers their specific mortgage rate or pricing; rather, it’s useful as a proxy to show how borrowing costs are directionally, in the short-term, shifting in the mortgage market.

**The “mortgage spread" represents the difference between the 10-year Treasury yield and the average 30-year fixed mortgage rate.

Over the past week, ResiClub PRO members got these 3 additional housing research articles:

The share of mortgage-free U.S. homeowners just hit a new high—here's why

Remote work is slowly pulling back from the pandemic peak—what it means for the housing market

Monthly report: Housing market inventory dynamics in 800+ metros, 3,000+ counties, +25,000 ZIPs

On Tuesday, U.S. home prices, as tracked by the Zillow Home Value Index, shifted from a +0.2% year-over-year rate of change to -0.01% year-over-year.

Below are the 6 major national home price indices that ResiClub tracks.