Mortgage rates have seen a downward trend for the third consecutive week, providing some relief for potential homebuyers. However, despite the decrease, rates remain significantly higher than they were at the same time last year. This cautious optimism among homebuyers is accompanied by ongoing challenges in the housing market, primarily related to low inventory levels. Nevertheless, there is a glimmer of hope as single-family housing starts to show signs of a rebound, which is expected to extend throughout the summer.
According to data released by Freddie Mac on Thursday, the 30-year fixed-rate mortgage averaged 6.67% in the week ending June 22, a slight decline from the previous week’s rate of 6.69%. Comparatively, a year ago, the 30-year fixed-rate mortgage stood at 5.81%. It is worth noting that mortgage rates have remained above 5% for almost the entire past year, with a peak of 7.08% in November. However, since the end of May, rates have been gradually decreasing.
Potential homebuyers have been closely monitoring mortgage rates and waiting for favorable conditions before entering the market. Despite the lower rates, they continue to face challenges due to the limited number of existing homes available for sale. The housing inventory remains at approximately half of the pre-pandemic levels, according to a separate report from the National Association of Realtors. However, there is some positive news in the form of increased home building. The Census Bureau reported a 21.7% rise in home construction in May compared to April, offering a glimmer of hope for the housing market.
Mortgage Rates Continue a Downward Trend, Remain Elevated Compared to Last Year
The average mortgage rate is based on data from mortgage applications received by Freddie Mac from thousands of lenders nationwide. The survey includes borrowers who have made a 20% down payment and have excellent credit.
Stubborn inflation has been a concern for the housing market, but there are signs of a cooling trend. The recent drop in the headline Consumer Price Index to 4% in May is a positive development. However, the core CPI, which excludes volatile food and energy prices, has not retreated as much as overall inflation. This situation presents a challenge for policymakers. Experts predict a potential faster slowdown in inflation in the coming months as the growth in the shelter index, which is the largest contributor to inflation, has peaked and started to trend downward since April.
Last week, the Federal Reserve decided to hold off on raising its key lending rate. The central bank wants to gather more data and observe the impact of recent rate increases on price growth and the real economy. The goal is to cool inflation and bring it down to a 2% level. While the Fed does not directly control the interest rates for mortgages, its actions have a significant influence on them. Mortgage rates generally follow the yield on 10-year US Treasuries, which are affected by a combination of expectations about the Fed’s actions, the actual decisions made by the Fed, and investor reactions. When Treasury yields increase, mortgage rates tend to rise as well.
Possibility of Further Hikes
Despite the recent decrease in mortgage rates, experts predict that rates will remain elevated throughout the rest of the year, given the possibility of further rate hikes. This emphasizes the importance of affordability in homebuyers‘ decisions. Buyers are increasingly attracted to relatively inexpensive markets where homes are listed below the national median price, resulting in notable price growth in these otherwise affordable areas. The intense competition in these markets may exacerbate the challenges faced by buyers with financial constraints, especially considering the limited supply of affordable homes.
While the surge in new home construction in April is a positive sign, there is an urgent need to build homes that cater to all income levels. A shortage of nearly 300,000 homes affordable to middle-income earners is contributing to the existing inventory shortage and low levels of affordability. Addressing this issue is crucial to alleviate the difficulties faced by potential homebuyers in finding suitable housing options.