Interest rates on mortgage loans have reached their lowest level in almost 15 months, prompting an increase in mortgage applications. The average rate on a 30-year fixed-rate mortgage fell to 6.47 percent for the week ending Aug. 8, according to Freddie Mac. This drop in rates has caught the attention of prospective homebuyers, who are eager to enter the market before rates go even lower and trigger more competition.
Sam Khater, chief economist at Freddie Mac, attributes the decline in rates to a “less than favorable employment report.” The recent labor data showed a spike in U.S. unemployment in July, signaling a potential recession. The drop in mortgage rates has increased the purchasing power of prospective homebuyers and has led to a rise in mortgage applications for refinancing. The refinance share of market mortgage applications has reached nearly 42 percent, the highest since March 2022.
The effect of declining mortgage rates is already visible in the mortgage application numbers. According to the Mortgage Bankers Association (MBA), mortgage applications rose 6.9 percent for the week ending Aug. 2 compared to the previous week. Joel Kan, MBA’s deputy chief economist, notes that this increase in volume is the highest since January. While applications for purchasing homes saw only small gains, refinance applications surged across all loan types. Homebuyers may be waiting for even lower rates before entering the market.
A key factor that will determine whether the decline in mortgage rates continues is the federal interest rates. The Federal Reserve has kept interest rates in a range of 5.25 to 5.50 percent since June. For mortgage rates to significantly come down, the Fed’s interest rates must first decline. According to data from the CME FedWatch tool, interest rate traders are expecting rate cuts of 25-50 percentage points in the September Federal Open Market Committee (FOMC) meeting.
With mortgage rates declining, there has been an increase in interest among prospective buyers. Real estate brokerage Redfin reports that home prices are also declining, making the buying environment more attractive. However, despite lower prices and mortgage rates, home affordability remains a significant issue. Recent data from the National Association of Realtors shows that an individual had to pay $2,303 per month to afford a median-priced existing single-family home in June. This amount is almost double the cost from 2021, and mortgage payments as a percentage of income have risen from 16.9 to 26.8 percent.
The combination of higher monthly payments and a larger percentage of income being allocated to homes is deterring potential buyers. While low mortgage rates may entice buyers, the overall affordability of homes remains a challenge in the current market.
