Falling mortgage costs: An unexpected benefit of rate cut speculations

Although the Federal Reserve has yet to cut interest rates, the mere expectation of it has already sent mortgage rates tumbling.

According to Mortgage Bankers Association (MBA) data, the average 30-year mortgage rate on conforming loan balances fell 0.13% to 6.87% for the week ending July 12—the biggest weekly drop in four months.

A conforming loan is a mortgage that meets the limits set by the Federal Housing Finance Agency, which is currently $766,550 or less.

The decline came as 30-year Treasury yields—a key barometer for long-term mortgage rates—have plunged from a high of 4.64% on July 1 to a low of 4.35% on July 17.

“Mortgage rates declined last week, as recent signs of cooling inflation and the increased likelihood of Fed rate cuts later this year pulled them lower,” said Joel Kan, MBA’s vice president.

Freddie Mac’s data point to a similar pattern in mortgage rates, with 30-year rates falling to their lowest levels since mid-March.

Declining rates seem to have sparked a wave of new mortgages. As MBA reported, applications rose by 3.9% in the third week of July—in tandem with the mortgage rate drop.

The housing market has been mostly subdued since the Fed began raising interest rates in 2022. As anticipation builds for rate cuts, there are signs that sidelined buyers are gearing up to jump back into the market.

Holding out until rates drop

Americans are understandably skittish about mortgage financing costs. During the pandemic, many buyers locked into 30-year mortgages in the low 3% range. Now, the same loan has to be financed at twice the cost.

“You have an entire generation of homebuyers that can’t imagine rates above 6%,” said Danielle Hale, chief economist at Realtor.com.

According to the National Association of Realtors (NAR), about one in five real estate professionals say that aspiring homebuyers are waiting for mortgage rates to drop before buying.

A separate study from the Bank of Montreal showed that 71% of would-be buyers are sidelined, waiting for rates to drop. Due to rising costs, 73% of aspiring buyers in the U.S. said the goal of homeownership “seems unattainable.”

The good news is that many economists expect mortgage rates to decline as the Fed targets a September rate cut. The bad news is that rates probably won’t fall as quickly as many hope.

For example, Realtor.com expects mortgage rates to fall to the low 6% range by the end of the year before dropping to around 5.75% by the end of 2025. NAR predicts 6.3% rates by the end of 2024.

These ranges are still way above the “magic” 5% threshold that Realtor.com believes is necessary to revive the housing market.

“For first-time homebuyers, if mortgage rates drop in the [5% range], that will boost their purchasing power,” Hale said. “For a lot of repeat buyers who already own a home, the lower rates go, the less of a jump they will take in their mortgage payments.”