Mortgage rates have fallen for the third consecutive week, offering a glimmer of hope to American homebuyers navigating a still-challenging housing market. The average rate for a 30-year fixed-rate mortgage dipped to 6.94% for the week ending May 23, down from 7.02% the previous week, according to data from Freddie Mac. This marks the first time since early April that the rate has dropped below the key 7% threshold, providing a modest respite for potential homebuyers.

Sam Khater, Freddie Mac's chief economist, noted the unexpected drop as a welcome development for spring homebuyers. "Spring homebuyers received an unexpected windfall this week, as mortgage rates fell below the seven percent threshold for the first time in over a month," Khater said in a release. The decline in rates comes as bond yields have mostly retreated this month, reflecting hopes that inflation might be stabilizing.

Despite the decline, the housing market remains under significant pressure. Sales of previously owned homes, which make up the majority of the market, fell in April for the second consecutive month, according to the National Association of Realtors (NAR). This contrasts sharply with the beginning of the year when sales were on the rise.

One of the critical issues affecting the housing market is the persistent under-supply of homes. Many homeowners are opting to stay put, holding on to the low mortgage rates they secured before the Federal Reserve began raising interest rates in 2022. This reluctance to sell is contributing to the shortage, despite some improvements in housing inventory over the past few months. NAR reported a 9% increase in total housing inventory at the end of April compared to the previous month, and a 16.3% rise from a year earlier. However, Lawrence Yun, NAR's chief economist, emphasized that the inventory remains tight. "The country needs around 1.6 million or higher for a few years to truly bring about a balance in the housing sector," Yun stated.

Another significant hurdle is the high cost of homes. The median price of an existing home rose to $407,600 in April, a 5.7% increase from a year earlier, marking the fourth straight month of price increases. This surge in home prices, coupled with high borrowing costs, has made it difficult for many Americans, especially first-time buyers, to afford homes. The S&P CoreLogic Case-Shiller US National Home Price Index also showed that home prices have been rising, with cities like San Diego, Chicago, and Detroit experiencing the fastest growth.

The overall pace of residential construction has not been sufficient to alleviate the pressure on the housing market. Although housing starts rebounded in April to an annual rate of 1.36 million units, this is still below the level needed to improve affordability significantly. "The housing shortage is not going away," Yun said, underlining the need for sustained construction efforts to meet demand.

The drop in mortgage rates has been partly driven by signs that the Federal Reserve might hold off on further interest rate hikes. Some Fed officials have indicated that they do not expect to raise rates again this year, with a few even suggesting potential rate cuts. This has led to a decrease in the benchmark 10-year US Treasury yield, which mortgage rates tend to follow.