Editor’s note: Freddie Mac, which has tracked weekly average mortgage rates since 1971 and has regularly made changes to its primary mortgage market survey, has changed the source of its November 17, 2022 data. Instead of surveying lenders, the weekly results are based on applications received from lenders submitted to Freddie Mac. Find out more about Freddie Mac’s change here.
Mortgage rates fell sharply last week after a slew of economic reports suggested inflation might finally be easing.
The 30-year fixed rate mortgage averaged 6.61% for the week ended November 17, up from 7.08% the week before, according to Freddie Mac, the biggest weekly decline since 1981. A year ago, the 30- year fixed interest rate at 3.10%.
Mortgage rates have risen for most of 2022, spurred by the Federal Reserve’s unprecedented campaign to raise interest rates to tame rising inflation.
Two major inflation reports – the consumer price index and producer price index – showed that prices rose more slowly than expected in October, suggesting inflation is moving in the right direction and may even have peaked.
“While the drop in mortgage rates is welcome news, there is still a long way to go in the housing market,” said Sam Khater, Freddie Mac’s chief economist. “Inflation remains high, the Federal Reserve is likely to keep interest rates high and consumers will continue to feel the impact.”
The average mortgage rate is based on mortgage applications Freddie Mac receives from thousands of lenders across the country. The survey only includes borrowers who are paying back 20% and have excellent credit ratings. But many buyers who invest less upfront money or have less than perfect credit scores pay more than the average rate.
Investors took last week’s lower-than-expected CPI data as a hint that the Federal Reserve could make smaller rate hikes in the coming months, said George Ratiu, manager of economic research at Realtor.com.
While the Fed doesn’t directly set the interest rates borrowers pay on mortgages, its actions affect it. Mortgage interest rates are generally based on the yield on 10-year US government bonds. When investors see or anticipate rate hikes, they take actions that push yields higher and mortgage rates higher.
“10-year Treasuries fell to 3.68% from 4.15% last Wednesday as capital markets seemed to welcome the slowing of inflation as a sign that the Federal Reserve’s monetary tightening is having the intended effect,” Ratiu said .
Although inflation data is moving in the right direction, the Fed has said it does not expect to hold back on rate hikes until inflation gets closer to the 2% target.
Still, last week’s mortgage rate cut has brought a touch of relief to buyers, Ratiu said.
A buyer who purchased the home at the median price with a 20% down payment at last week’s median rate of 7.08% faced a monthly payment of about $2,280, according to Realtor.com. At a rate of 6.61%, the same buyer’s payment would drop to $2,174. While the savings of $100 a month might not seem like much, the buyer would save nearly $48,000 in interest over the course of a 30-year loan.
Those savings prompted some homebuyers to step in and secure a lower mortgage rate.
Mortgage applications rose for the first time in seven weeks, for both purchase and refinance applications, according to the Mortgage Bankers Association.
“Signs of easing inflation have pushed mortgage rates below 7% for the first time since mid-October, but with rates still relatively high and affordability reduced accordingly, the average loan amount is now at its lowest level in nearly two years,” he said Bob Broeksmit, President and CEO of the MBA.
Affording a home of your own remains a challenge for many homebuyers. Mortgage rates are expected to remain volatile for the remainder of the year. And prices remain high in many areas, particularly where there is a very limited inventory of homes for sale.
At the same time, inflation and rising interest rates mean that many potential buyers are faced with tight budgets.
“For consumers, rapidly rising prices have created significant financial pressures, especially as inflation wipes out any wage gains,” Ratiu said. “The Fed’s rate hikes are directly linked to higher interest rates on credit cards and car loans, which, along with higher mortgage debt, are putting additional strain on household finances.”
According to Realtor.com, more than 20% of listings have seen price drops as sellers adjust their strategy to accommodate buyers in a changing financial landscape.
“On the one hand, sellers have come to terms with the fact that houses priced for the housing market we saw when interest rates were 3%, very few buyers are able to manage mortgage payments at today’s rates” , Ratiu said. “On the other hand, buyers may be reluctant to move forward with transactions if they are concerned about the unpredictable nature of current mortgage rates.”
Mortgage rate volatility is not expected to abate anytime soon, which will unsettle both buyers and sellers.
“With inflation still above 7% and the Fed committed to raising interest rates further over the next few months, the mortgage market isn’t out of the woods yet,” Ratiu said. “We could still see rates climb back above 7% before the end of the year.”