- Prospective homebuyers have seen a steep rise in mortgage rates over the past six months.
- Bank of America says rates are poised to come back down, which should make homes more affordable.
- The bank predicts the 30-year mortgage rate will fall to 4.5% by year end.
Homebuyers could soon have some good news about mortgage rates.
The average annual rate for a 30-year mortgage is likely to fall to 4.5% by the end of the year, a decrease from the decade-plus high of about 5.81% in June, Bank of America analysts said in a report Friday.
A move like that would ease affordability concerns for homebuyers who have seen the average mortgage rate nearly double from the end of 2021. The unprecedented jump left would-be homeowners with the prospect of paying hundreds of dollars more each month than they would have had to a year prior.
Mortgage rates reached an all-time low of 2.7% in late 2020, according to Freddie Mac, adding to a runaway housing market in which demand for homes far outweighed supply. But the Federal Reserve has recently hiked the federal funds rate to combat inflation, which resulted in higher mortgage rates, too.
The Fed’s efforts to curb inflation seem to be working in the eyes of investors. The expectation for the two-year inflation rate has dropped to 3.2% from 4.4% in mid-June, according to Bloomberg. Housing costs are a crucial piece of measuring inflation, and higher mortgage rates have had a cooling effect on home sales and home-price growth.
A key metric to look at is the difference between the yield on a 10-year Treasury note — a common benchmark in debt markets — and the rate for a 30-year mortgage. Today the 30-year mortgage rate of 5.3% is about 2.56 percentage points higher than the 10-year Treasury yield, well above the long-term average of 1.75 percentage points. That suggests lenders have some room to drop their home-loan rates and still earn acceptable returns.
The 10-year Treasury yield has dropped by 0.75 percentage points since mid-June, to about 2.75%, a level that Bank of America expects to see at year end. It says mortgage rates will keep falling if interest-rate volatility declines, narrowing their distance from the 10-year Treasury yield. If that spread reverts to the historical average, that would put the 30-year mortgage rate at about 4.5%.
“We expect this to happen and see it as improving the affordability outlook for housing,” the Bank of America analysts, led by Chris Flanagan, wrote.
In a monthly forecast released July 18, the Mortgage Bankers Association predicted a more modest drop in mortgage rates, putting the 30-year rate at 5.2% at year end.