U.S. mortgage rates took a dive this week, as the Federal Reserve signaled that it could cut interest rates soon, depending on the health of the U.S. economy.
The 30-year rate fell in response to the lowest level since early February to 6.73% as of August 1, according to Freddie Mac FMCC.
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Freddie Mac’s weekly report on mortgage rates is based on thousands of applications received from lenders across the country that are submitted to Freddie Mac when a borrower applies for a mortgage.
A year ago, the 30-year was averaging at 6.9%.
Will they fall further, and if so, by how much? MarketWatch asked four housing economists, and here’s what they said.
What causes mortgage rates to go up and down?
The Federal Reserve doesn’t set mortgage rates. Rates move based on what the market expects the Fed to do.
And because the Fed studies the U.S. economy and its health, the market does too, reading all the indicators carefully.
“Mortgage rate changes tend to precede actual Fed moves because investors are trying to anticipate where the Fed will go,” Danielle Hale, chief economist at Realtor.com, told MarketWatch.
For now, the most closely-watched indicators are the consumer-price index, which shows the rate of inflation, and the strength of the labor market, Lawrence Yun, chief economist at the National Association of Realtors, said.
Maintaining the health of the labor market and keeping inflation under control are the “two pillars of the Fed’s dual mandate,” Hale added, and hence will be “important mortgage rate movers.”
What did the Fed say?
During a press conference with reporters, Federal Reserve Chairman Jerome Powell said that the hikes in interest rates so far have resulted in “a lot of progress” towards bringing inflation under control.
“The job is not done on inflation, but nonetheless we can afford to begin to dial back the restriction in our policy rate,” he added.
“The question will be whether the totality of the data … are consistent with rising confidence on inflation and maintaining a solid labor market,” Powell said. “If that test is met, a reduction in our policy rate could be on the table as soon as our next meeting in September.”
How quickly will mortgage rates fall?
Mortgage rates fell immediately on the back of Powell’s comments. Because the market moves rates, its assessment that the Fed might move to cut in September pushed rates lower quickly.
As to whether they will go lower from here, economists were mixed.
“I don’t expect mortgage rates to fall much more from here, given that three rate cuts are already priced into the rates we’re seeing,” Orphe Divounguy, senior macroeconomist at Zillow Z Home Loans, told MarketWatch on Wednesday after the Fed meeting.
“We may get some shrinking of the spread between the yield on the 10-year Treasury note and the 30-year fixed rate mortgage,” he added, and “if that happens — and that’s a big if — a 50-80 drop in basis points brings mortgage rates down to low 6’s.”
NAR’s Yun agreed. “Mortgage rates will fall immediately after the Fed’s rate cut from watching the 10-year bond yield, but there will be more movement due to Friday’s job data, which further gives [an] outlook on the degree of rate cuts over the next 12 to 18 months,” he said.
On Friday morning, the federal government reports its July jobs report, which paints a picture of the health of the labor market.
What’s the forecast for mortgage rates?
Yun expects the 30-year rate to fall to 6.5% by the end of 2024, and 6% by the end of next year.
Realtor.com’s Hale expects rates to go down to the mid-6% range by the end of this year.
Lisa Sturtevant, chief economist at Bright MLS, said that she expects the 30-year to be around 6.4% in the fourth quarter of this year, and fall to the low-6% range in 2025.
What’s the monthly payment for a typical home?
National home prices, according to the NAR, hit a record high in the month of June.
For a home buyer who is purchasing a median-priced $392,600 home with a 30-year mortgage rate of 6.78%, their median monthly mortgage payment would be roughly $2,300, according to analysis by real-estate brokerage Redfin RDFN as of July 28.
What’s the bottom line for home buyers?
The bottom line for home buyers holding out for rates to drop is that even if rates fall, home prices will still keep rising for now, Sturtevant said, which pretty much keeps housing affordability at status quo.
“Mortgage rates will come down more this fall, landing at about 6.4% by the fourth quarter. Home prices, however, are not projected to fall so affordability is still a key challenge, particularly for first-time homebuyers,” she explained in a statement.
Nonetheless, “more inventory [is] coming onto the market in the second half of the year,” she added, which “will provide more options for buyers and will also moderate home price growth in the months ahead.”
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