Housing Market Sees Mixed Signals as Mortgage Rates Hold Steady
This week, the average 30-year fixed-rate mortgage hovered at 6.49%, according to Freddie Mac. While this is a slight increase from the previous week, it remains significantly below the two-decade high seen last fall. The modest decline in borrowing costs appears to be spurring homeowners to refinance, with mortgage applications surging 17% last week. Refinancing activity, in particular, shot up by an impressive 35%, according to the Mortgage Bankers Association.
The recent drop in mortgage rates, which hit a one-year low, has been a welcome development for borrowers. Analysts predict further decreases later this year as the Federal Reserve is expected to cut interest rates, potentially easing the financial burden on homebuyers and homeowners alike.
Despite these positive trends, housing affordability remains a pressing issue. Rising home prices and persistent inventory shortages have kept homeownership out of reach for many Americans, particularly in high-cost urban centers such as San Diego and New York. Nationally, home prices have hit record highs several times this year, according to data from S&P Global and the National Association of Realtors (NAR).
“Housing has a lot of challenges ahead of it, not the least of which are high mortgage rates, high home prices, and a lack of inventory,” said Tom Porcelli, Chief US Economist at PGIM Fixed Income. The average monthly mortgage payment has doubled over the past four years, creating significant financial strain for prospective buyers.
A lack of available housing units continues to fuel price increases. However, some progress has been made, with housing inventory improving each month in 2024, according to NAR. In regions like Tampa, Denver, and Minneapolis, an uptick in residential construction has helped moderate price growth. Tampa, for instance, has experienced a surge in new housing developments, easing inflation in the area significantly from over 11% in 2022 to just 2.4% this year.
The Federal Reserve’s ongoing effort to combat inflation has been hampered by persistently high shelter costs. While inflation has dropped from its 2022 highs to a 2.9% annual rate in July, shelter expenses accounted for nearly 90% of last month’s consumer price increases. Excluding shelter, inflation rose by only 1.7% over the past year, highlighting the outsized impact of housing costs on the broader economy.
Amid these challenges, lower borrowing costs could provide some relief. Economists anticipate the Fed will lower its benchmark interest rate by a quarter-point as early as next month, with some speculation of a more significant half-point reduction. These cuts are expected to influence mortgage rates indirectly through their effect on the 10-year US Treasury yield, a key benchmark for mortgage pricing.
However, even as rates decline, it remains unclear if they will drop below 6%. While this would bring rates closer to pre-2022 levels, they are still considerably higher than what was seen during the past decade. For now, the housing market continues to navigate a complex landscape of fluctuating rates, high prices, and limited supply, leaving prospective buyers and policymakers grappling with the question of how to create a more accessible path to homeownership.