U.S. mortgage rates dropped from an eight-month high, after nearing 7 percent last week, as inflation slows ahead of next week’s Federal Reserve policy meeting.
The Fed’s aggressive interest-rate hike policy sent mortgage rates well above 7 percent last year, causing the once booming housing market to crash.
Rates have been slow to decline from the nearly two-decade high, forcing many potential buyers out of the market.
The 30-year fixed-rate mortgage fell to 6.78 percent in the week ended July 20, from 6.96 percent the week before, according to Freddie Mac on July 20. This was first decline since June and the biggest weekly drop since March.
The rate remains well above the 5.54 percent recorded at the same time last year and the pre-pandemic average of 3.9 percent.
The average rate on a 15-year mortgage, which is popular among homeowners who plan to refinance, also fell to 6.06 percent, from last week’s 6.3 percent.
“As inflation slows, mortgage rates decreased this week,” said Sam Khater, Freddie Mac’s chief economist.
“Still, the ongoing shortage of previously owned homes for sale has been a detriment to homebuyers looking to take advantage of declining rates.”
“On the other hand, homebuilders have an edge in today’s market, and incoming data show that homebuilder sentiment continues to rise,” Mr. Khater said.
30-Year Mortgage Rates Remain High
For the past 12 months, except for one week, 30-year mortgage rates have been well over 5 percent.
Rates reached their historical high of 7.08 percent last November, after which rates started to cool off and are have been sitting below 6.5 percent for most of this spring.
Then in May, mortgage rates began to surge again as uncertainty around the federal debt ceiling grew and interest rates were continued to be raised by the Fed, as inflation appeared more persistent than anticipated.
Despite last month’s inflation data being generally positive, analysts are awaiting the results of next week’s Federal Open Market Committee (FOMC) policy meeting, which concludes on July 26.
“Though inflation has slowed, the level remains well above the 2 percent target and investors expect the Fed to hike interest rates in pursuit of this target,” said Hannah Jones, an economic data analyst at Realtor.com.
“As markets prepare for next week’s FOMC meeting and the probable resulting interest-rate hike, strong employment data and cooling inflation suggest that the economy’s progress toward stability is on the right track,” she said.
Although the Fed’s policy rates does not affect mortgages directly, its actions influence them, since mortgage rates tend to track the yield on 10-year U.S. Treasurys.
Treasuries are both affected by anticipation of the central bank’s moves and investors’ reactions.
When yields go up or down, mortgage rates tend to to follow.
“While the federal funds rate does not directly impact mortgage rates, it installs a floor beneath the cost of borrowing, meaning mortgage rates are likely to remain elevated for the time being,” explained Ms. Jones.
Volatile Mortgage Rates Rile the Housing Market
“Everyone has been spoiled by the past 15 years of low interest rates,” Dave Liniger, chairman of REMAX, told CNN.
Mr. Liniger said homebuyers may be “stuck” with these interest rates for the foreseeable future.
“We’re just going to have to learn to live with 6.5 percent or 7 percent mortgage rates for six to 18 months,” he added, dismissing certain predictions that the Fed will stop raising interest rates due to a slowdown in inflation.
However, Lawrence Yun, chief economist at the National Association of Realtors, told CNN that he predicts that mortgage rates will be closer to 6 percent by the end of the year.
“This is the top,” said Mr. Yun, an optimist over the direction of mortgage rates, adding “it will begin to move down.”
He said he is “fairly confident” that inflation will continue to calm due to easing rent prices, allowing the Fed to halt rate hikes after an additional increase this month.
Lisa Sturtevant, the chief economist at Bright MLS, agreed, telling Fox Business that “it is not likely we will see mortgage rates below 6 percent before the end of 2023.
“But rates should continue to come down from where they have been this summer. The question is whether they will fall enough to entice sellers into the market who will have to give up the super low mortgage rate they secured during the pandemic,” said Ms. Sturtevant.
Homebuyers Wait for Mortgage Rates to Drop Before Purchasing
Ms. Jones said that buyers are waiting for rates to cool off, after mortgage rates hovered in the 6–7 percent range for the past 10 months. Most investors predict that such a drop will happen in the second half of this year.
“Though home prices have softened slightly nationally, the still-high cost of borrowing means hopeful homebuyers have felt little relief,” said Ms. Jones. Even just a minor change in rates can affect how much potential homebuyers pay each month.
A May study from LendingTree compared the average monthly payments on 30-year fixed-rate mortgages in April 2022, when the rate hovered around 3.79 percent, to April 2022, when rates rose to 5.25 percent.
The report found that the increase cost borrowers hundreds of dollars more each month, which could add up to as much as $75,000 over the lifetime of the 30-year loan.
Home prices have been slow to fall as potential buyers face a worsening inventory shortage, despite higher interest rates.
Lack of Available Homes Pushing Up Prices
Sales of existing homes has been dropping due to a shortage of available homes, which were down 47 percent in June from pre-pandemic levels, according to Realtor.com
Many sellers who had locked in an ultra-low mortgage rate before the pandemic are now reluctant to sell with rates continuing to hover near 7 percent, leaving less homes for buyers.
“Many home owners feel ‘locked-in’ by their current mortgage rate and are therefore choosing to hold off on listing their home for sale,” said Ms. Jones.
“As a result, after more than a year of new listings lagging behind the previous year’s pace, the number of homes for sale has tracked lower than last year’s levels for the past four weeks.”
Due to limited home inventory, buyers are being forced to turn to new construction and builders are accelerating the pace of construction to fill the gap, according to Realtor.com.
“The current market dynamics are likely to persist until affordability and inventory gains are made,” said Ms. Jones.
