Why Mortgage Rates Have Hit Their Lowest Point in Over a Year
Homebuyers are finally getting some relief, as mortgage rates have dropped to their lowest level in more than a year. The average interest rate for a 30-year fixed mortgage now stands at 6.47%, according to Freddie Mac. That’s down more than a percentage point from last year’s peak, when the Federal Reserve began raising interest rates to fight inflation.
So, what’s behind this sudden drop in mortgage rates?
Experts say it’s due to a growing expectation that the Fed will soon begin cutting interest rates. A weaker-than-expected jobs report last week bolstered those expectations, triggering a drop in yields for 10-year treasuries, which in turn sent mortgage rates plummeting.
“These 10-year treasury rates are going to directly translate into lower mortgage rates,” explains Julia Fonseca, a professor at the University of Illinois at Urbana-Champaign.
The Fed’s Role
The Fed has been holding interest rates steady at their highest level in two decades. However, market observers are now all but certain that the Fed will cut rates at its next meeting in September. The CME FedWatch Tool, which measures market sentiment, shows a 100% chance of a rate cut.
“That jobs report made markets reevaluate the path of future interest rate cuts,” says Lu Liu, a professor at the University of Pennsylvania who studies real estate. “Mortgage rates are priced off of current treasury rates, and treasury rates have already incorporated these expectations for future rate cuts.”
Economic Outlook
The future of mortgage rates depends heavily on the trajectory of the economy. The economy has been cooling for months, and inflation is starting to come down. However, it’s still too early to say whether the U.S. is headed for a recession.
Some economists, like Stijn Van Nieuwerburgh of Columbia University Business School, believe that the economic slowdown will continue, leading to further interest rate cuts and falling mortgage rates.
“We’ve reached peak interest rates,” Nieuwerburgh says. “Mortgage rates are likely to come back down for the next several years.”
However, Liu cautions that the economic outlook is uncertain. If the economy slows down too much, the Fed may be forced to raise rates again to prevent a recession.
Lock-In Effect
Even if mortgage rates continue to fall, it may not be enough to reignite the housing market. Many homeowners are reluctant to sell their homes and risk getting a higher mortgage rate on their next purchase. This phenomenon, known as the “lock-in effect,” could continue to keep supply low and home prices elevated.
“We might not see very much movement in the housing market,” says Fonseca. “Borrowers are locked in at low rates, and they’re not going to give them up.”
Conclusion
The drop in mortgage rates is a welcome relief for homebuyers. However, it’s still too early to say whether this trend will continue. The future of mortgage rates depends on the trajectory of the economy and the Fed’s response to it.
