Could massive mortgage rate drop supercharge refinances and DSCR investments?

[AJ Wong]

The FED left interest rates unchanged today and indicated that they are likely to begin cutting several times in the coming year. 

The mortgage market has responded with one of the largest daily rate drops in my two decade memory, and a near historic daily decline in treasury yields on record. 

Traditional 30 year fixed conventional mortgages on owner occupied homes are quickly pressing into the low 6% range for well qualified buyers and below that for those that utilize rate buy downs or seller concessions. 

Some FHA or government products, including cash out refinances, rates are in the 5%'s!? much sooner than most (including myself) anticipated.

The rapid reduction in rates could have a multi faceted effect on the investor market:

- Initially there are many proposed investment purchases that the numbers just have not crunched at 8-9-10-11%'s. Many investment property DSCR loans or alternative income documentation loans have been pricing at just that. The ratios don't work, however if we see a significant re-price on investor loan products, expect a rush of those tentative deals to close.

- Refinances and or HELOC & Second mortgages. Those that purchased in the past year, certainly saw elevated interest rates. If rates drop enough, there could be opportunity to refinance investment or multi family properties, reinvest into capital improvements or consolidate a portion of record consumer debt by tapping record equity. Many lenders are increasingly offering fixed, or variable rate seconds that can close quickly. A few lender friends of ours have indicated a dramatic increase in cash out refinance business the past two weeks.

- Variable rate and/or interest only products could reach very enticing rates and provide significant cash flow improvement. 

Theoretically if the FED were to reduce rates in each of the next three quarters, we could see a .75-1.5% reduction in the FED FUNDS rate and correspondingly conventional mortgage rates in the 5%'s on a 30 year fixed and potentially a 4%'s handle on shorter duration (15-20 year) primary, AAA conforming borrower's. 

I'd expect an uptick and small flurry of all types of mortgage applications (purchase & refinance) and particularly heightened demand and interest for the limited multi family inventory across CA, the PNW and FL.

At least in Oregon, the market has been semi-responsive to rate movements, and timing will be critical to taking advantage of any rate reduction opportunities. 

I'll be sending an annoying email to my clients this weekend with a market update and adjusted 2024 forecast. 

What do you think, will lower rates supercharge mortgage and purchase applications? Will rates get low enough that owners/investors refinance their often lower primary interest rates? 

It will be interesting to see the effect of potential lower Jumbo and Super Jumbo mortgage rates on the luxury market as well.