Mortgage Rates Decline Amid Strong Employment and Inflation Data

Mortgage rates have dropped for the second consecutive week, with the average 30-year fixed-rate mortgage falling nearly a quarter of a percentage point over the past two weeks. The 30-year fixed-rate mortgage averaged 6.74% for the week ending March 14, down from 6.88% the previous week, according to Freddie Mac. This marks a slight decrease from last year’s average of 6.60%.

However, homebuyers should not anticipate a significant drop in rates in the coming months. Despite the recent decline, mortgage rates are expected to remain high due to persistent inflation pressures. “Despite the recent dip, mortgage rates remain high as the market contends with the pressure of sticky inflation,” said Sam Khater, Freddie Mac’s chief economist.

Rates Remain High Amid Inflation Concerns

Over the last four months, mortgage rates have decreased from the peak of 7.79% observed last year. This has somewhat improved affordability for homebuyers who have been navigating one of the least affordable housing markets in decades. Nonetheless, robust inflation readings and unexpectedly strong job numbers in February indicate that the economy is hotter than analysts and economists would prefer.

Homebuyers continue to be highly sensitive to interest rate changes. The slight drop in rates last week led to a 7% increase in mortgage applications for the week ending March 8, as reported by the Mortgage Bankers Association.

The Federal Reserve’s Influence on Mortgage Rates

The Federal Reserve’s aggressive campaign to hike interest rates has significantly curbed inflation over the past two years. However, Fed Chair Jerome Powell has emphasized the need for more consistent evidence of improving inflation before considering rate cuts. Market expectations suggest that Fed rate cuts may not occur before summer, and possibly not until fall. This delay in rate cuts contributes to keeping mortgage rates elevated.

While the Federal Reserve does not directly set mortgage rates, its actions influence them. Mortgage rates tend to follow the yield on 10-year US Treasuries, which are impacted by expectations regarding Fed actions, actual Fed decisions, and investor reactions. Lisa Sturtevant, chief economist at Bright Multiple Listing Service, noted, “In the short-term, mortgage rates are probably not going to fall much further this month.”

Market Dynamics and Affordability Challenges

Some homebuyers are relieved to see rates lower than those from last fall when they approached 8%. “Any downward trend in rates later this spring will bring more buyers — and sellers — into the market,” Sturtevant said. Currently, mortgage rates are approximately one percentage point lower than their peak last year.

For instance, in October, with a median home price of $391,800 and an average mortgage rate of 7.79%, the typical monthly payment with a 20% down payment was $2,254. This week, a home priced similarly with a mortgage rate of 6.74% would result in a monthly payment of $2,031, saving the buyer around $220 per month. However, rising home prices might offset some of these savings.

Although more inventory is becoming available, typical for the peak spring homebuying season, affordability challenges persist. Some buyers might delay purchasing in hopes that mortgage rates will drop further. However, this strategy has its risks. Falling mortgage rates are not guaranteed, and home prices are expected to increase. “Spring buyers may see higher mortgage rates, but summer buyers are likely to see higher home prices,” said Jones.

In conclusion, while the recent drop in mortgage rates offers a slight reprieve for homebuyers, the overall economic environment and housing market dynamics suggest that rates will likely remain elevated, and prospective buyers should weigh their options carefully.