The 30-year mortgage rate in the U.S. dropped last week to its lowest point in 15 months, driven by the Federal Reserve hinting at possible rate cuts in September and a cooling job market.
This combination spurred financial markets to bet on significant reductions in borrowing costs.
The Mortgage Bankers Association reported that the average contract rate on a 30-year fixed-rate mortgage fell 27 basis points to 6.55% for the week ending Aug. 2.
This marks the sharpest drop in two years and the lowest rate since May 2023.
For potential homebuyers, this dip offers a glimmer of hope in an otherwise tough housing market, where rising home prices and borrowing costs have made affordability a distant dream.
Fannie Mae’s July housing sentiment index reflects this struggle, with only 17% of respondents believing it’s a good time to buy a home, down from 19% in June.
Additionally, 35% indicated a preference for renting over buying, the highest level since 2011.
Doug Duncan, Fannie Mae’s chief economist, commented, “Whether this signals buyer fatigue or deeper market disenchantment remains to be seen, but it could have significant implications if the trend continues.”
Refinancing Surge
The rate drop also presents an opportunity for homeowners with higher interest rates to refinance and cut their payments.
Refinancing applications soared to a two-year high, lifting the refinance share of total loan applications to 41.7%, the highest since the Fed’s first rate hike in March 2022.
However, home purchase activity only edged up by less than 1%, constrained by limited home inventory and rising prices.
The Fed’s aggressive rate hikes in 2022 and 2023, aimed at curbing inflation, had pushed borrowing costs to their highest in decades.
Last week, the Fed signaled that cooling inflation and a slowing labor market might prompt a rate cut as early as next month. The Fed’s policy rate has remained in the 5.25%-5.50% range for over a year.
Just two days after the Fed’s latest policy meeting, the Labor Department reported a rise in the U.S. unemployment rate to 4.3% in July and a slowdown in hiring, sparking recession fears.
This triggered a slide in business equities, which rebounded by Tuesday, and a rally in U.S. Treasuries, driving their yields down and dragging mortgage rates along with them.
Anticipated Rate Cuts
While the Fed kept rates steady in July, its focus on labor market health alongside inflation control has already started to impact mortgage rates.
San Francisco Fed President Mary Daly noted, “You already see policy working, even before we cut the rate.”
Interest rate futures are now betting on a full percentage point cut in the Fed’s policy rate by the end of the year, starting with a half-point reduction next month.
More than 4 million mortgages originated since 2022 have interest rates of 6.5% or higher, according to ICE Mortgage Monitor.
However, over 60% of mortgages have rates below 4%, per Freddie Mac data, suggesting that significant rate drops are needed to make refinancing or purchasing new homes worthwhile for many homeowners.
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