Cash-strapped homebuyers just caught an unexpected break: Mortgage rates plunged this week to the lowest point since mid-2023. As of Aug. 6, some lenders were even offering 30-year fixed rates below 6%.
This significant rate drop comes as a surprise to economists, many of whom expected mortgage rates to stay high for the remainder of 2024. But that baseline forecast also included a soft landing for the U.S. economy — meaning the Federal Reserve’s high-rates policy would ease inflation back to target without triggering a recession — a scenario that has been challenged by July’s weaker-than-expected jobs report released Aug. 2.
Here’s why interest rates on mortgages have fallen and what lower rates could mean for prospective homebuyers and new homeowners.
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What’s Happening With Mortgage Rates?
Mortgage interest rates fluctuate based on a number of intertwined factors — such as economic conditions, investor appetite and market demand — which can make them difficult to follow in real-time. So here’s a shortcut: For high-level insights on mortgage rate trends, look to the yield on the 10-year Treasury bond, which the 30-year fixed mortgage rate tends to track.
U.S. Treasury yields slid in the wake of July’s jobs report, which sounded alarm bells for investors and led to a tumultuous few days of trading in the stock market after its release on Aug. 2. Longer-term Treasury yields and mortgage rates tend to fall when economic growth slows and investors sell off riskier financial products (like stocks) and turn to safer investments (like government bonds and mortgage-backed securities).
Through Monday, mortgage rates plunged to unforeseen lows. But by midday on Tuesday, both the bond market and the stock market started to normalize, suggesting that mortgage rates would also plateau. And although it’s difficult to forecast future rate movements, buyers shouldn’t expect mortgage rates to fall further in the immediate term, says Selma Hepp, chief economist at CoreLogic.
“As economists, we’re still debating how bad this labor report was really,” Hepp says. “I wouldn’t get ahead of ourselves in terms of further declines in mortgage rates. This is sort of as low as we’re going to get for a little while.”
As for where mortgage rates are headed in the coming months as the dust settles, it’s hard to speculate: “like layering a guess on top of a prediction,” says Robert Frick, corporate economist at Navy Federal Credit Union.
While cooling inflation and a weakening job market could put further downward pressure on rates through year-end, the prospect of a recession is “an overreaction to market volatility not linked to any fundamental changes in the economy,” says Frick. Even though mortgage rates have been high over the past two years (at least by modern standards), buyers have benefited from a robust job market with low unemployment and rapid wage growth.
Mortgage rates are falling, but at the same time, the U.S. economy is weakening — which could give some prospective buyers pause before making such a momentous financial decision.
Lower Rates Lure Homebuyers Off the Sidelines
If homebuyers are timid about buying a home in a slowing economy, they’re not showing it yet. If anything, early data shows that lower mortgage rates are releasing pent-up buyer demand. After all, two-thirds of homebuyers in a March U.S. News survey said they were holding out for lower rates before buying a home in 2024 — and they’ve already been waiting for six months.
“I think the inactivity in the market we’ve had this year is that everybody’s been waiting for the rates to drop,” Hepp says. “When mortgage rates drop, buyers come in.”
On the mere mention of lower rates, mortgage applications rose during the first week of August to the highest levels since January, according to the Mortgage Bankers Association. And over this past weekend following the July jobs report, mortgage application volume increased by 20% at Rocket Mortgage, according to the company’s chief business officer, Bill Banfield.
“Now may be the right time to take advantage of these lower rates, whether you are a homeowner who bought in the last year and are looking to refinance, or a homebuyer who has been waiting on the sidelines to finally purchase,” Banfield says.
However, those who do decide to buy a home amid falling rates may face a different headwind: other homebuyers. In 2024 so far, buyer demand has been low and the inventory of homes for sale has been steadily rising. Yet home prices have stayed resiliently high, and lower rates could foster competition by unleashing that pent-up demand.
“The problem with buying remains the price of homes continues to reach all-time highs, and the lack of inventory,” Frick says. “Plus, there’s the likelihood that what buying does occur with these lower interest rates will bid prices even higher, keeping purchases relatively low.”
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Millions of Homeowners Stand to Refinance on Lower Rates
High mortgage rates haven’t just impacted home purchase demand, they’ve also essentially cut mortgage refinance demand to near-zero. There’s not much incentive to refinance when rates are at 7% but three-quarters of outstanding mortgages in the U.S. have an interest rate below 5%.
Given this week’s mortgage rate trends, the number of homeowners who can benefit from refinancing is finally growing. CoreLogic estimates that around 3 million homeowners have the potential to refinance with rates dropping, Hepp says.
“I do think lower rates are going to help bring people off the sidelines, both for buyers and for refi,” Hepp says. “Maybe a little bit more so for refi activity. That’s something that happens faster than a home purchase.”
Among those who stand to benefit most are recent homebuyers who took out a mortgage when rates were 7% or higher. Back in September 2023, 84% of recent buyers told U.S. News in a survey they planned to refinance in the future, so it may come as a relief that rates are finally beginning to retreat.
Even a small change in rates can make a sizable impact on a loan’s monthly payments, helping to bring affordability within reach. On a $400,000 mortgage with a 7% rate, the monthly principal and interest payment would be $2,661. At a 6% rate, the monthly payment drops by $260, to just under $2,400.
Of course, homeowners should be advised that refinancing costs money, too. They’ll need to crunch the numbers to see if lower rates will save them enough money to offset the upfront cost of refinancing.
[Read: Best Mortgage Refinance Lenders.]
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As Stocks Tumble, Homebuyers Catch a Break With Lower Rates originally appeared on usnews.com
