The standard 30-year fixed-rate mortgage saw a slight increase this week, reaching 6.49%, according to Freddie Mac’s report on Thursday. While this rate is slightly higher than last week, it remains significantly below this year’s peak and last fall’s two-decade high, which has motivated many homeowners to refinance their mortgages.
Last week, mortgage applications rose by 17%, driven mainly by a remarkable 35% increase in refinancing applications, as reported by the Mortgage Bankers Association on Wednesday. Freddie Mac’s data shows that mortgage rates fell to their lowest level in over a year last week.
Looking ahead, borrowing costs are expected to decrease further this year if the Federal Reserve implements the interest rate cuts that economists and investors widely anticipate.
Despite the decline in mortgage rates, the housing market in the United States remains out of reach for many, especially for those with low incomes living in urban areas experiencing rapid home-price growth, such as San Diego and New York. Home prices have hit record highs multiple times this year, based on data from S&P Global and the National Association of Realtors.
“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,” Tom Porcelli, chief U.S. economist at PGIM Fixed Income, shared with CNN in an interview. He noted that the average mortgage payment is still double what it was four years ago.
A persistent shortage of available housing in many markets across the country continues to drive home prices up. Although there has been progress toward a more affordable market, with total housing inventory improving each month in 2024, as per NAR data, demand continues to outpace supply.
In some areas like Tampa, Denver, and Minneapolis, a rise in residential construction has helped ease housing costs. The pace of homebuilding in these areas depends on factors such as local zoning laws, land availability, and population growth trends. In Tampa, the combination of an influx of new residents and ample land availability has spurred home construction, leading to a significant slowdown in shelter-cost growth. This deceleration in housing costs has contributed to a substantial reduction in overall inflation in the metropolitan area, bringing it down to 2.4% for the year ending in May, a significant decrease from over 11% in 2022.
However, the persistently high cost of housing continues to be a challenge for the Federal Reserve’s ongoing efforts to combat inflation. Although inflation has decreased significantly from the 40-year highs observed in the summer of 2022, reaching an annual rate of 2.9% in July—marking the first time in more than three years that the Consumer Price Index (CPI) has been below 3%—the Fed’s target remains at 2% year over year. Shelter costs accounted for nearly 90% of the increase in consumer prices last month.
When excluding shelter costs, the CPI was up 1.7% for the 12 months ending in July, according to the Labor Department.
For Americans concerned about the country’s housing affordability crisis, there is some hope in the form of expected lower interest rates. As inflation has been brought under enough control and the job market has shown signs of weakening, economists believe the Federal Reserve may begin lowering borrowing costs as early as next month. The unemployment rate, currently at 4.3%, the highest since October 2021, could potentially climb higher in the coming months, adding to the argument for reducing rates.
However, the expected rate cuts are not anticipated to be substantial. The Fed is likely to lower its benchmark lending rate, which influences borrowing costs throughout the economy, by a quarter-point in September. Some traders speculate that the Fed might opt for a larger cut of half a point, though other economic indicators suggest the economy remains strong. Data released by the Commerce Department on Thursday indicated that consumer spending is still driving economic growth.
Federal Reserve officials have indicated that the enduring strength of the economy has allowed them to take a cautious approach, waiting for clear evidence that inflation is under control and on a path to the Fed’s 2% target. Additionally, recent comments from central bankers do not suggest any plans for aggressive action in the upcoming month.
Although the Federal Reserve does not directly set mortgage rates, its actions do influence them through movements in the benchmark 10-year U.S. Treasury yield. Bond yields typically decrease after weak economic data increases the likelihood of the Fed cutting rates, and they tend to rise when strong economic data suggests the Fed may keep rates higher for longer.
While mortgage rates are expected to decline further this year, it remains uncertain whether they will drop below 6%. Despite the anticipated decrease, rates are still higher than those seen in the decade leading up to 2022, the year when the Federal Reserve began aggressively raising interest rates to combat inflation.
