The national average for a 30-year fixed-rate mortgage has declined for the fourth consecutive week. According to Freddie Mac's latest report, the rate inched down to 6.86% from 6.87% the previous week, marking its lowest point since early April. This trend offers a glimmer of hope for a housing market that has been sluggish due to high rates and affordability challenges.
The recent decline in mortgage rates comes as both buyers and sellers have been navigating a difficult market. Many potential sellers have opted to stay put to retain their favorable mortgage rates, while buyers have faced significant affordability hurdles. Joel Kan, deputy chief economist for the Mortgage Bankers Association (MBA), noted, "We are probably going to see rates decline slowly from here through the end of the year." He added that this anticipated decline could ease inventory and affordability issues, encouraging potential homebuyers.
The MBA predicts that the Federal Reserve will cut its benchmark federal funds rate twice in 2024, potentially lowering mortgage rates to around 6.5% by year-end. "I think the odds are still fluctuating, but that's the base case," Kan said, highlighting improving inflation data as a key factor driving the potential decline in interest rates. Consumer prices rose by 3.3% year over year in May, indicating a positive trend in inflation control.
Freddie Mac's chief economist, Sam Khater, echoed this sentiment, stating, "The 30-year fixed-rate mortgage continues to trend down, hitting the lowest level in almost three months. By historical standards, the economy is in good shape, and we expect rates to continue to come down over the summer months, bringing additional homebuyers back into the market."
However, the housing market remains in a state of flux. Sales of previously occupied U.S. homes fell in May for the third consecutive month, and sales of newly built single-family homes declined in April and May by 7.7% and 16.5%, respectively. These figures underscore the ongoing challenges within the market, despite the recent easing of mortgage rates.
Mortgage rates are influenced by various factors, including the Federal Reserve's interest rate policy and the movements in the 10-year Treasury yield, which lenders use to price home loans. The yield, which had peaked at over 4.7% in late April, has been mostly falling, reflecting slower economic growth and easing inflationary pressures. This trend could persuade the Federal Reserve to lower its main interest rate, which is currently at its highest level in over 20 years.
The Federal Reserve has indicated that inflation has been moving closer to its target level of 2% in recent months. Earlier projections had suggested up to three rate cuts in 2024, but current expectations are for a more conservative approach, with potentially only one cut by the end of this year. Jiayi Xu, an economist at Realtor.com, commented, "Relief may come too little and too late for many first-time homebuyers."
Despite the recent easing, mortgage rates remain high compared to historical lows, creating a challenging environment for homebuyers. At the current average rate, a homebuyer would pay approximately $1,600 monthly on a $300,000 home with a 20% down payment. A drop to 6.5% could reduce this payment by nearly $100 per month, significantly impacting affordability for many buyers.
Financing demand has remained relatively flat, with the MBA's Market Composite Index, which tracks weekly mortgage loan application volume, increasing by less than 1%. New mortgage application activity rose by 1% but is still 13% lower than the same week last year. Refinancing activity remained unchanged.
As the year progresses, the trajectory of mortgage rates will be closely watched by market participants. The MBA is forecasting a further drop in rates to around 6.5% by year-end. However, this may not be sufficient to entice homeowners who secured ultra-low rates during the pandemic to sell, as nearly 90% of homes with a mortgage have a rate of 6% or lower.
