Mortgage Rates Could Fall Below 5% and ‘Re-Liquify’ Banks: Fundstrat

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Mortgage rates could fall more than 200 basis points next year as the Federal Reserve slashes borrowing costs, boosting US consumers and banks, according to Fundstrat’s head of research Tom Lee.

In an interview with CNBC on Wednesday, Lee predicted mortgage rates could fall to around 4.75%-5.2% next year. The 30-year fixed rate is currently around 6.95%, according to Freddie Mac data, down from a high of around 8% in October.

“That 200-basis-point drop in mortgage rates we know would stimulate the consumer and re-liquify regional bank balance sheets, which is an earning story too,” he added, noting that would be a normal spread compared to the current 10-year yield. 

Markets are eagerly anticipating the Fed to slash interest rates sometime next year, and rate cut expectations have already started to lower borrowing costs across the economy. 

The 10-year Treasury yield has tumbled below 3.9% after hitting 5% two months ago, bringing down mortgage rates and other borrowing costs.

Most real estate experts only see a slight dip in mortgage rates next year. Redfin, for instance, is forecasting mortgage rates to hover around 6.6% by the end of 2024

Still, falling rates are likely to jump start home sales activity, real estate economists say, after high rates sidelined prospective home buyers from the market for most of the past year. And that could end up being a boon for lenders and corporate earnings overall, Lee said.

Meanwhile, banks have been under pressure from the Fed’s aggressive tightening cycle. In fact, a new working paper from researchers at USC, Columbia, Stanford, and Northwestern estimated that commercial real estate sector is at risk of seeing its biggest crash since 2008, and that could slam US banks with up to $160 billion in losses

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