WASHINGTON (TNND) — Mortgage rates have continued to tumble downward after being stuck near 7% for more than a year, ramping up the cost of homeownership and pricing many would-be buyers out of the market entirely.
The decline in mortgage rates could bring buyers who have been sitting on the sidelines due to high rates that exacerbate the nation’s affordability crisis back to the market, which has been in a standstill for the last three years with list prices continuing to grow and elevated rates making mortgages more expensive to finance.
Mortgage buyer Freddie Mac said on Thursday that the 30-year rate averaged 6.35% for the week ending Sept. 11, down from 6.5% the week prior. It was the largest weekly drop in rates this year and the third consecutive week that saw a decline.
Improvements in rates have brought a rush of interest to the housing market that has been held down by constantly increasing costs from a lack of supply, higher insurance premiums and stubborn asking prices.
“Mortgage rates are headed in the right direction and homebuyers have noticed, as purchase applications reached the highest year-over-year growth rate in more than four years,” Freddie Mac chief economist Sam Khater said.
The Mortgage Bankers Association said on Wednesday that mortgage applications, a signal of housing market activity, increased 9.2% from the week earlier as rates hit their lowest point since last October in a sign of renewed activity in what has been a frozen housing market for years.
“The downward rate movement spurred the strongest week of borrower demand since 2022, with both purchase and refinance applications moving higher. Purchase applications increased to the highest level since July and continued to run more than 20% ahead of last year’s pace,” MBA vice president and deputy chief economist Joel Kan said in a statement.
Mortgage rates have dropped as expectations for a rate cut from the Fed have increased and odds of additional cuts later this year became more likely with a stalling job market.
The Fed’s decisions on its benchmark interest rate are not directly tied to mortgages, which tend to track the yield on 10-year Treasurys. Yields are influenced by investor expectations that sway with moves from the central bank.
But whether rates will continue to fall is uncertain as the Fed could take a more cautious approach on lowering rates after next week’s meeting with inflation still running above target. Thursday’s consumer price index showed inflation rose to 2.9% on an annual basis, sticking above the Fed’s goal of 2%.
Mortgages rates are also not guaranteed to fall along with the Fed’s rate decisions. They increased last year when the central bank cut rates to protect the job market.
“Looking ahead, rates may stabilize or even rise slightly after the FOMC meeting, as markets—positioned for more aggressive easing—could be disappointed by the Fed’s guidance, further limiting potential housing activity,” Realtor.com economist Jiayi Xu wrote in a post.
Even with lower rates, the market is still very expensive with home prices continuing to rise for both new and existing homes and other rising costs like insurance that most analysts are expecting to keep the market contained.
The median price for an existing home has increased for 25 consecutive months, reaching $422,400 in July, according to the National Association of Realtors. Costs are also high in the new home market, with the median sales price of $403,800, according to National Association of Home Builders data.
Activity in the market has mostly been at a standstill over the last three years, which has led to a growing level of homes sitting on the market for longer. The inventory of homes for sale has grown for 22 consecutive months, giving a limited pool of buyers more options to choose from and power to negotiate with sellers. The typical home sold sat on the market for 28 days in July, an increase from 24 days during the same period last year.
But the pace of inventory improvements is slowing with the market mostly frozen and rates still significantly higher than what most homeowners are already locked into. More than 80% of homeowners have interest rates below 6%, reducing their incentive to put their homes on the market along with higher costs to buy a new one.
Some analysts believe rates would need to get beneath the 6% threshold to see significant improvement in housing market activity. What happens with the labor market, which has also shown signs of stalling out with shrinking levels of job creation and rising unemployment, could also play a major factor on the housing market’s recovery moving forward. Consumers are significantly less likely to make major financial purchases during times of economic uncertainty.