Mortgage rates fell sharply this week after weaker-than-expected jobs data increased the likelihood of a Federal Reserve rate cut next month.
This is a big step in the right direction for America’s notoriously unaffordable housing market.
The standard 30-year fixed-rate mortgage averaged 6.47% this week, mortgage finance giant Freddie Mac said Thursday. That’s well below last week’s average of 6.73% and marks the lowest level since May 2023.
Mortgage rates have been falling steadily in recent weeks since hitting their 2024 high of 7.22% in early May. Rates are below their two-decade high reached late last year.
“The decline in mortgage rates increases the purchasing power of potential homebuyers and should stimulate their interest in purchasing,” said Sam Khater, chief economist at Freddie Mac, in a press release.
“In addition, this drop in interest rates is already providing some existing homeowners with the opportunity to refinance, with the refinance share of mortgage applications in the market reaching nearly 42 percent, the highest level since March 2022.”
Affordability remains difficult
Home prices have soared across the country, and demand for housing still exceeds supply despite some steady improvements this year. According to data from S&P Global, buying a home is out of reach for many buyers, especially low-income earners in areas experiencing rapid price growth such as New York, San Diego and Las Vegas. The situation is no better for renters, according to a recent report from the Harvard Joint Center for Housing Studies.
But borrowing costs are expected to fall further this year, and economists have already told CNN that the worst of the housing market may already be behind them.
Mortgage rates are guided by the 10-year U.S. Treasury yield, which moves in anticipation of the Fed’s interest rate decision. Bond yields fell sharply last week after the government’s latest jobs report showed that unemployment rose last month to its highest level since October 2021.
The Fed said at its policy meeting last week that it was concerned about risks to the labor market. Weaker labor market data would allow the Fed to cut interest rates, but the central bank does not want the economy – or the labor market – to tank.
Wall Street is currently betting that the Fed will cut interest rates sharply this year. According to the CME FedWatch tool, a sharp half-percentage-point cut is planned at Fed policy-setting meetings next month, followed by two quarter-percentage-point cuts by the end of the year.
The Fed continues to watch inflation data closely, waiting for further signs that price pressures are coming under control. However, further signs of a deteriorating labor market could prompt the central bank to cut interest rates more aggressively. The next inflation forecast will be released on Wednesday, when the consumer price index for July is released.
More houses on the market
A persistent undersupply of housing has put upward pressure on property prices in many markets across the country, but there are signs of some easing.
Total housing inventory has increased every month so far this year, ending June at 1.32 million units, up 3.1% from May and an astonishing 23.4% from a year ago, according to NAR figures. However, some metropolitan areas, such as Tampa, Denver and Minneapolis, have seen significant increases in housing construction over the past year, which has helped housing costs there ease somewhat.
The median price for a used home in the U.S. rose to $426,900 in June, up 4.1 percent from a year earlier, according to the latest data from the National Association of Realtors. This was the second consecutive month that home prices hit an all-time high and the 12th consecutive month of rising prices.
Homes have become so expensive in recent years that the number of U.S. cities where first-time buyers have to pay $1 million for the average entry-level home has nearly tripled since 2019, according to a study by Zillow.
The difficult market has also had a negative impact on purchasing activity: Sales of used homes fell 5.4 percent in June, NAR said.
“Mortgage rates are coming down faster than many expected,” said Ralph McLaughlin, senior economist at Realtor.com. “The recent downward trend is encouraging news for prospective homebuyers who have waited until next year to enter the market.”
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