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BofA sees ‘path to a 5% mortgage rate’ if the Fed pulls off these 2 things

Core Viewpoint - Bank of America’s mortgage-backed securities research team is analyzing the potential for U.S. mortgage rates to decrease, influenced by Federal Reserve actions and macroeconomic conditions [1][2]. Mortgage Rate Projections - The MBS team believes a path to a 5% mortgage rate exists if the Federal Reserve implements quantitative easing in mortgage-backed securities and aggressive yield-curve control, reducing 10-year Treasury yields to 3.00%-3.25% [2]. - The baseline expectation is for mortgage rates to end 2025 and 2026 at 6.25%, a slight decline from the current average of approximately 6.35%, which has improved from 6.9% recently [3]. Market Reactions and Affordability - Despite Wall Street's optimism regarding potential rate cuts, even a reduction to 5% may not significantly alleviate the affordability challenges faced by American homebuyers [4]. - Housing stocks have seen a rise in anticipation of rate cuts, with companies like D.R. Horton, Lennar, and PulteGroup being highlighted; however, the underlying demand remains sluggish despite lower rates and builder incentives [6]. Economic Scenarios - Two potential scenarios are outlined: a spike in unemployment leading to a flight to safety in financial markets, which could lower mortgage rates, or a severe recession prompting the Fed to cut rates and possibly resume purchasing mortgage-backed securities [5].