A Silver Lining for Homebuyers as Market Adjusts
In a welcome development for prospective homebuyers, mortgage rates have dipped below 7% for the first time since mid-August, marking the seventh consecutive week of rate declines. The decline comes as a result of improving inflation figures and the Federal Reserve’s decision to pause its rate increases.
The 30-year fixed-rate mortgage rate averaged 6.95% in the week ending December 14, down from 7.03% the previous week, according to data from Freddie Mac. A year ago, the average rate stood at 6.31%. The consistent drop in rates over the past weeks signals a potential thawing of the housing market in the new year.
Sam Khater, Chief Economist at Freddie Mac, expressed optimism, stating, “Potential homebuyers received welcome news this week as mortgage rates dropped below 7% for the first time since August.” Khater added that with inflation decelerating and the Federal Reserve’s indication of possible rate cuts in 2024, a gradual improvement in the housing market is anticipated in the coming year.
Despite the encouraging news, the housing market remains the least affordable since 1984, presenting challenges for buyers. The recent decline in mortgage rates has led to a rise in mortgage applications for the sixth consecutive week, according to the Mortgage Bankers Association. The increase suggests growing borrower demand, particularly among first-time buyers struggling to find homes within their budget.
Lisa Sturtevant, Chief Economist at Bright MLS, noted that homebuyers are acting opportunistically, taking advantage of lower rates during the period between Thanksgiving and New Year’s, traditionally a slower period in the housing market. However, she cautioned that the market won’t heat up quickly due to persistently low inventory.
While falling mortgage rates typically attract more buyers, the constrained inventory situation takes precedence in the current market. Nearly two-thirds of current mortgage holders have interest rates of 4% or lower, making it challenging to motivate homeowners with ultra-low mortgage rates to sell, even if rates drop to the mid-6% levels.
Jiayi Xu, an economist at Realtor.com, highlighted the lock-in effect, where existing homeowners benefit from lower rates on their current mortgages, contributing to low inventory levels. As a result, home shoppers are expected to compete over limited inventory, keeping prices elevated and affordability a top concern.
The impact of the Federal Reserve’s pause and its signal of potential rate cuts in 2024 have played a significant role in the recent decline in mortgage rates. Investors anticipated the Fed’s decision to maintain its benchmark federal funds rate, leading to lower mortgage rates in conjunction with falling 10-year Treasury yields.
While the Fed does not directly set the interest rates for mortgages, its actions influence them. Mortgage rates, tracking the yield on 10-year US Treasuries, respond to market expectations and reactions to the Fed’s policies. The Fed’s projections, including a lower median expectation for the fed funds rate in 2023, further indicate a potential easing of interest rates in the coming year.
As the housing market navigates the challenges of low affordability and constrained inventory, the recent drop in mortgage rates offers a glimmer of hope for prospective homebuyers, potentially paving the way for a more favorable market in the new year.