Interest rates for the most popular U.S. home loan plummeted to their lowest in 15 months last week, following indications from the Federal Reserve that it might cut its policy rate in September. Additionally, a cooling job market has fueled expectations of significant reductions in borrowing costs.
The Mortgage Bankers Association reported on Wednesday that the average contract rate for a 30-year fixed-rate mortgage fell by 27 basis points to 6.55% for the week ending August 2, marking the lowest rate since May 2023 and the steepest drop in two years.
This decline offers potential homebuyers some respite in an increasingly unaffordable housing market, where rising home prices and borrowing costs have been prevalent. This was underscored by Fannie Mae’s July housing sentiment index, which revealed that only 17% of respondents felt it was a good time to buy a home, down from 19% in June. Moreover, 35% indicated they would prefer to rent their next residence, the highest proportion since 2011.
Doug Duncan, chief economist at Fannie Mae, remarked on the trend: “It’s difficult to tell if this reflects simple buyer fatigue or a greater sense of disenchantment with the market, but it could have significant implications if it continues.”
Refinancing Surge
The drop in interest rates also presents an opportunity for homeowners who purchased when rates were higher to refinance and lower their payments. The MBA’s 30-year average rate had peaked at 7.9% last October.
Refinancing applications surged to their highest level in two years, according to the MBA. This increased the refinance share of total loan applications to 41.7%, the highest since the week of the Fed’s first rate hike in March 2022. Meanwhile, purchase activity rose by less than 1%, constrained by a low inventory of homes for sale, which has driven prices up.
The Fed, whose aggressive rate-hike campaign in 2022 and 2023 pushed borrowing costs to their highest in decades, signaled last week that cooling inflation and a slowing labor market could prompt a rate cut as soon as next month. The central bank has maintained its policy rate in the 5.25%-5.50% range for over a year.
Following the Fed’s latest meeting, the Labor Department’s jobs report showed the U.S. unemployment rate jumped to 4.3% in July, with hiring slowing down. This raised fears of a potential recession, triggering a stock market slide that reverberated globally before stabilizing earlier this week. Major U.S. stock indices were trading higher again on Wednesday.
The labor market data also sparked a rally in U.S. Treasuries, lowering their yields and consequently mortgage rates, providing a silver lining for millions of American households seeking new homes or cheaper housing.
Anticipated Rate Cuts
Although the Fed left rates steady at its July meeting, its post-meeting policy statement indicated a heightened focus on labor market health alongside inflation control. San Francisco Fed President Mary Daly noted that this shift has already impacted mortgage rates as investors anticipate the Fed’s next move. “You already see policy working, even before we cut the rate,” she said.
Interest rate futures now suggest that the Fed will cut its policy rate by a total of a full percentage point by the end of the year, starting with a half-point reduction next month.
According to Intercontinental Exchange’s ICE Mortgage Monitor, over 4 million mortgages originated since 2022 have interest rates of 6.5% or higher. However, data from Freddie Mac indicates that more than 60% of mortgages have rates below 4%, suggesting that for many homeowners, mortgage rates would need to drop significantly to justify refinancing or to consider buying a new home.
