With the Federal Reserve poised to cut interest rates as early as September, mortgage rates have already begun to decline in anticipation. This trend of falling mortgage rates is likely to continue, as market expectations have driven borrowing costs lower, potentially easing further before the Fed officially takes action.
Current Mortgage Rate Trends
The average rate on a 30-year fixed-rate mortgage has dropped to its lowest level since early February. Recent data from Freddie Mac revealed that mortgage rates fell to 6.73%, down from a peak above 7.2% earlier this year. As stocks sold off and bond markets rallied, mortgage rates fell even further. Mortgage News Daily reported that the average rate dropped to 6.3% earlier this week, marking the lowest level in over a year.
The decline in mortgage rates is closely tied to the performance of the 10-year Treasury note. As bond prices rise and yields fall, mortgage rates typically follow suit. On Monday, the yield on the 10-year Treasury note dropped to its lowest level in over a year, trading below 3.7% at session highs. This relationship between bond yields and mortgage rates is a key factor driving the current trend of falling mortgage rates.
Market Expectations and the Fed’s Role
Douglas Duncan, chief economist at Fannie Mae, explained that the market has already priced in expectations for a Fed rate cut, which has contributed to the decline in mortgage rates. “When the 10-year [Treasury] comes down, the mortgage rate typically comes down with it,” Duncan told Yahoo Finance. He further noted that the reset in the mortgage market is largely due to the expectation of Fed rate cuts.
Jeff DerGurahian, chief investment officer and head economist at LoanDepot, shared a similar perspective, stating that “the 30-year mortgage rates can continue to fall ahead of actual Fed rate cuts, as they are priced off of 5-10-year bonds, not the Fed Funds Rate.” However, he also cautioned that any further drop in rates may be limited until there is more certainty about the timing and size of the Fed’s actions.
Impact on the Housing Market
Despite the decline in mortgage rates, the housing market continues to face challenges, particularly with affordability. Rates have stayed above 6% since early last year, and recent housing data indicates that potential buyers remain hesitant. Applications for mortgages to purchase homes increased by just 1% last week, and they are still 11% lower than they were a year ago.
At the same time, home prices have reached new highs, further complicating the affordability landscape. In June, home prices hit a new peak for the second consecutive month, while the pace of existing home sales slowed. This suggests that homeownership remains out of reach for many, even as falling mortgage rates provide some relief.
On the other hand, the drop in rates has led to an increase in refinancing activity. The Mortgage Bankers Association reported a 16% rise in applications to refinance home loans last week, as homeowners took advantage of the lower rates to secure better terms on their existing loans.
What Lies Ahead
As market participants continue to anticipate a Fed rate cut, mortgage rates could see additional declines in the coming weeks. However, the extent of these declines will depend on the evolving economic landscape and the Fed’s next moves. With a disappointing jobs report heightening fears of a recession, there is growing speculation that the Fed may cut rates by as much as half a percentage point in September.
For now, the trend of falling mortgage rates offers a potential opportunity for both homebuyers and homeowners looking to refinance. However, with the housing market still facing significant affordability challenges, it remains to be seen how much relief these lower rates will provide in the long term.
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