Bofa sees “the path to a mortgage rate of 5%” if the Fed realizes these 2 things

The MBS team wrote on Tuesday that it “sees a route to a mortgage rate of 5%” as long as the Fed achieves two shares: quantitative relaxation (QE) in the securities backed by mortgages and aggressive control of the yield curve to the point that the yields of the treasury at 10 years are summed up to 3.00%to 3.25%. The 10 years is essential because it serves as a reference for fixed mortgage rates of 30 years.

According to the Bank of America Research “Room” Room “published on September 16, the expectation of reference is that mortgage rates put an end to 2025 and 2026 to 6.25% – a moderate drop in the current national average almost 6.35%, which notes Bofa was a great improvement of 6.9% recently. This is based on a treasury yield at 10 years of approximately 4.00% and approximately 4.25% by the end of 2026.

While Wall Street gathers behind the possibility, even a 5% drop will probably not bring a large relief to American buyers faced with the narrowest crunch of affordability for decades.

Lance Lambert, co -founder and editor -in -chief of Resiclub, said Fortune He sees one of the two scenarios taking place. In a hypothetical scenario where the unemployment rate has increased and the economy has weakened, it said that the financial markets “could react by a flight to security – by increasing the demand for treasury bills, which would increase the prices of higher obligations and yields (including mortgage rates).”

In the case of a recession, Lambert said that the Fed could respond with emergency discounts at the rate of federal funds and, “if the slowdown was sufficiently serious, potentially resumes purchases of securities leaning against mortgages, adding additional drop on mortgage rates.”

Why reduced rates alone might not move the needle

The housing actions have increased on the anticipation of the cuts, noted Bofa, invoking companies such as Dr. Horton, Lennar and Pultegroup, but the notes of the analyst stress that the fundamentals have lagged behind, and the real demand is “still slow” despite lower rates and increased incentives of manufacturers. Even during the previous episodes of lower rates, affordability failed to improve.

FortuneSydney Lake reported Zillow’s projections in August. In July, Lake reported that the number of buyers for the first time was reduced to half the historic standard.

The BOFA note quantifies the challenge: through recent cycles, even net rate drops have not offered wide affordability. After the drop in prices in September 2024 – the most recent analog rates – the dead rates have briefly dropped but then bounced, the assessments of the manufacturer of culminating houses and that shares decrease by 20% or more in the following months. The increase in yields of the treasury and persistent supply constraints has undermined any potential relief of the buyer.