Mortgage rates drop to their lowest level in six months

Mortgage interest rates have fallen to their lowest level in six months, Freddie Mac reported last week, possibly alleviating a tough climate for prospective home buyers.

The average rate on the 30-year fixed-rate mortgage fell to 6.73% from 6.78% the week before after the Federal Reserve indicated it was ready to take supportive action in November. The rates for a 15-year fixed mortgage fell to 5.99%, down from 6.07% over the same period.

A year ago, the average rate on a 30-year fixed-rate loan was 6.9%, while the rate on a 15-year loan was 6.25%.

Freddie Mac appeared to acknowledge concerns over affordability in the report on its website, which struck a cautious tone. Mortgage applications fell 3.9% in the week to July 26 on a seasonally adjusted basis.

“Expectations of a Fed rate cut coupled with signs of cooling inflation bode well for the market, but apprehension in consumer confidence may prevent an immediate uptick as affordability challenges remain top of mind,” said Sam Khater, Freddie Mac’s chief economist.

“Despite this, a recent moderation in home price growth and increases in housing inventory are a welcoming sign for potential homebuyers.”

At the end of July, the Fed voted to leave interest rates unchanged but suggested a September rate cut could be on the cards. This came as Fed chair Jerome Powell said the central bank had made “further progress” toward achieving its 2% inflation target.

A let-up in affordability?

Elevated mortgage rates have contributed to worsening housing affordability, which hit its worst level since the 1980s earlier this year, according to an April analysis by Creditnews Research.

An increase of just a percentage point in rates can add hundreds of dollars to monthly payments.

The mortgage burden has more than doubled since the start of Covid and is significantly higher than at any point since 1981, when mortgage rates hit a record high of 18.38%.

“To buy a home at current home prices and interest rates, the average American family would spend more than half their monthly income on mortgage payments alone. This far exceeds the 30% threshold recommended by the Department of Housing and Urban Development,” said Sam Bourgi, Senior Credit Analyst at Creditnews

Experts, such as Bruce McNeilage, CEO of Nashville-based real estate company Kinloch Partners, have warned rates could continue to rise due to a lack of housing supply.

“I’m calling 8%,” McNeilage predicted. “There is not enough supply out there. Supply and demand is working. The value and price of homes is just simply not going down.”

Freddie Mac’s latest data, alongside the Fed’s recent shift to a more dovish posture upbeat on the possibility of rates continuing to fall this year, has encouraged a more positive stance, however.

“We expect that mortgage rates will continue to drift lower through the remainder of the year, particularly if the Fed does launch a series of rate cuts in September,” Mike Fratantoni, chief economist for the Mortgage Bankers Association, told Yahoo Finance.

Last week, The National Association of Realtors’ chief economist Lawrence Yun predicted the 30-year fixed mortgage rate will fall to 6.5% or lower in the coming months.

He previously suggested “the new normal for mortgage rates” will be around 6% in an interview with CNBC on July 9.