Mortgage rates have fallen to their lowest level since February 2023, providing a glimmer of hope for potential homebuyers grappling with a tough housing market. According to Freddie Mac, the average rate on a 30-year fixed mortgage dropped to 6.2% this week, down from 6.35% just a week earlier and well below the 7.18% rate from a year ago. The decline marks a significant decrease from the nearly 7.8% peak observed in October 2023, offering potential savings for homebuyers in a challenging economic environment.
Sam Khater, Freddie Mac's chief economist, noted the decline in rates is driven by incoming economic data that is "more sedate." He pointed out, however, that despite the improving mortgage rate environment, many prospective buyers remain on the sidelines, deterred by high house prices and a persistent shortage of available homes. "Rates continue to soften," Khater said, "but the challenges of high prices and limited supply are keeping buyers cautious."
This drop in mortgage rates comes as the Federal Reserve prepares to make a crucial decision on interest rates in the coming week. Signs of a slowing job market and cooling inflation have strengthened the case for the Fed to consider easing rates for the first time in over four years. Although the Fed does not directly set mortgage rates, its actions influence them through movements in bond yields. The benchmark 10-year U.S. Treasury yield, which typically moves in anticipation of the Fed's decisions, has declined in recent weeks, reflecting expectations of lower future interest rates.
Despite the favorable shift in borrowing costs, the broader U.S. housing market remains largely unaffordable for many. A key issue contributing to the affordability crisis is the persistent lack of housing supply, which has been exacerbated by various factors, including high construction costs, restrictive zoning laws, and labor shortages. This shortage has been particularly felt in cities experiencing rapid home-price growth, such as New York City, San Diego, and Las Vegas, according to data from S&P Global.
Renters, too, are feeling the squeeze. A recent Moody's report highlighted that renters in major urban centers, including New York, Los Angeles, and Miami, are spending more than 30% of their income on rent. This rent-to-income ratio reflects the ongoing strain on affordability in some of the nation's largest and most expensive markets.
While total housing inventory has seen some improvement this year, it remains insufficient to meet demand. The National Association of Realtors (NAR) reported that housing inventory stood at 1.33 million units at the end of July, a slight increase from June and a 19.8% rise compared to the previous year. However, these gains are still not enough to alleviate the pressures faced by homebuyers, leading to sluggish demand despite the recent dip in mortgage rates.
The challenges facing the housing market are reflected in the continued decline of the Pending Home Sales Index, a key measure of housing contracts. In July, the index fell to 70.2, the lowest reading since the NAR began tracking it more than two decades ago. A year ago, the index stood at 76.7, highlighting the ongoing difficulties in the market.
Mortgage applications, both for purchasing homes and refinancing existing mortgages, have shown only modest gains. Applications to purchase a home rose by 2% from the previous week, but they remain well below the levels seen a year ago. Refinancing applications also increased by 1% week over week but have yet to reach the volumes recorded last year. Joel Kan, deputy chief economist at the Mortgage Bankers Association (MBA), noted that while lower rates have provided some relief, the pool of homeowners who could benefit from refinancing is limited due to many borrowers already holding mortgages with sub-5% interest rates.
As the housing market continues to navigate these challenges, the upcoming Federal Reserve decision could play a pivotal role in determining the direction of mortgage rates and, by extension, the broader housing market. Jessica Lautz, deputy chief economist at the NAR, emphasized that many homebuyers are holding out for further rate cuts, anticipating potential savings in the near future. "Nearly everyone is expecting that the Fed is going to cut rates in September," Lautz said, "and with that, the mortgage market has already anticipated those changes."
