Washington, DC
CNN
—
Mortgage rates edged lower this week as a smaller rate hike by the Federal Reserve signaled an encouraging improvement in inflation.
30-year fixed-rate mortgages fell 6.09% on average in the week ending Feb. 2 from 6.13% a week ago, according to data released Thursday by Freddie Mac. A year ago, the 30-year fixed rate was 3.55%.
After rising for most of 2022, spurred by the Fed’s tough rate hikes to curb rising inflation, mortgage rates have been trending lower since November amid data that continue to show inflation has peaked.
Mortgage rates haven’t been this low since September and are now almost a full point below last year’s peak of 7.08%, last reached in early November.
“This one percentage point reduction in interest rates could allow up to three million more mortgage-ready consumers to qualify for a loan with an average home price of $400,000,” said Freddie Mac Chief Economist Sam Khater.
On Wednesday, the Fed approved its smallest interest rate hike since March. The move to slow the pace of growth sends a clear signal that the central bank is making progress in its fight against inflation.
Although the Fed does not directly set the interest rates that borrowers pay on their mortgages, its actions affect them. Mortgage rates tend to track the yield on the 10-year U.S. Treasury bond, based on a combination of expectations about the Fed’s actions, what the Fed actually does, and investors’ reactions. When Treasury yields rise, so do mortgage rates; when they go down, mortgage rates tend to follow.
As inflationary pressures ease, mortgage originators have followed suit by lowering the cost of borrowing, said George Ratiu, manager of economic research at Realtor.com.
The impact of the Fed’s actions has kept a floor under mortgage rates for the short term, he said, and he expects rates to remain around 6% for the next few weeks.
“The Federal Reserve controls short-term rates, but long-term rates, including 30-year mortgage rates, are a function of market expectations about the path of the economy,” said Mike Fratantoni, senior vice president and chief economist for Mortgage. Bankers Association. “And investors are betting that the economic slowdown and the Fed’s recent victory over inflation will push interest rates lower over time.”
The MBA predicts that mortgage rates will decline by nearly 5% by 2023.
Other economic data plays a role in changing mortgage rates, including reports on jobs and inflation.
“The latest indicators still point to a resilient economy,” Ratiu said. Despite the Fed’s efforts to cool the economy, the labor market remains tight: Wednesday’s Job Openings and Labor Turnover Survey, or JOLTS, showed 11 million jobs were added in December, the highest since July.
Housing economists and those in the mortgage market are looking to the next inflation report due on February 14 to see if the pace of price increases continues to slow.
Despite low interest rates in recent weeks, mortgage applications fell 9% last week compared to the previous week, according to the MBA.
“Despite lower rates, overall application activity declined last week, indicating a still-volatile time of year for housing activity,” said Joel Kahn, vice president and deputy chief economist at MBA. “Buying activity is expected to be boosted by low interest rates and moderate home price growth as the spring home buying season begins. “Both trends will help some buyers regain their purchasing power.”
Ratiu said low rates for the housing market eased the financial burden on homebuyers.
According to Realtor.com, housing market data for January showed that the number of homes for sale increased, properties stayed on the market longer and prices fell 11% from their peak in 2022.
“The down payment for today’s median home buyer is lower than it was last summer,” Ratiu said. “While this is positive news, affordability remains a major challenge, particularly for first-time buyers.”
The average mortgage rate is based on mortgage applications Freddie Mac receives from thousands of lenders nationwide. Only borrowers with 20% down and excellent credit are included in the survey. Many buyers with less down payment or less than ideal credit will pay more than the average rate.