The average rate on a 30-year mortgage in the United States has eased for the second consecutive week, now sitting at 6.95%, down from 6.96% the previous week, as reported by mortgage buyer Freddie Mac. Although this slight decline may appear minimal, it offers little relief to prospective homebuyers who are gearing up for the spring purchasing season. For context, this time last year, the average rate was lower at 6.63%.
In parallel, the borrowing costs associated with 15-year fixed-rate mortgages, which are particularly appealing to homeowners looking to refinance, have also slightly decreased. This week, the average rate fell to 6.12% from 6.16%, although it remains higher than the 5.94% recorded a year ago.
Mortgage rates are influenced by a variety of macroeconomic factors, one of which is the bond market’s reaction to the Federal Reserve’s interest rate policy. In recent months, the average rate on a 30-year mortgage had briefly dipped to a two-year low of just above 6% in September 2023. However, since then, rates have generally trended upwards, reflecting a significant increase in the 10-year Treasury yield, a key indicator that lenders use for pricing home loans.
The yield, which was around 3.62% in mid-September, reached as high as 4.79% two weeks ago, driven by concerns over persistent inflation that appears to be exceeding the Federal Reserve’s target of 2%. Contributing to these rising bond yields are economic stability in the U.S. and apprehensions surrounding tariff policies and other regulations that could stem from the Trump administration.
As of Thursday, the 10-year Treasury yield was reported at 4.53%. High mortgage rates can significantly impact borrowers, potentially adding hundreds of dollars each month to their mortgage payments. This elevated cost has acted as a deterrent for many home shoppers, culminating in a nationwide slump in home sales that has persisted since 2022. While there was a small uptick in the sales of previously occupied homes in December, overall, 2024 is projected to conclude as the worst year for home sales in nearly three decades, an even steeper decline compared to the already dismal performance in 2023.
Sam Khater, Freddie Mac’s chief economist, emphasized that affordability issues, exacerbated by high interest rates and an ongoing supply shortage, continue to keep many potential homebuyers on the sidelines. Recent data from the National Association of Realtors indicates that pending home sales fell by 5.5% in December from the previous month, effectively ending a four-month streak of increases. This decline signifies a potential decrease in completed home sales in the coming months, as there is typically a lag period of one or two months between when a contract is signed and when the sale is finalized.
Interestingly, as home sales have slowed, the inventory of available properties has increased. Although current inventory levels are still low by historical standards, they have surged nearly 25% compared to last year, according to Realtor.com. This increase in available homes is a positive development for buyers who can afford to navigate the current mortgage landscape or those who are in a position to pay cash.
However, for individuals hoping for a significant drop in mortgage rates, the outlook appears grim. Many economists forecast that the average rate on a 30-year mortgage will likely remain above 6% throughout this year, with some predictions suggesting rates could even rise to as high as 6.8%. This is further compounded by the Federal Reserve’s recent decision to maintain its benchmark interest rate without changes, following a series of cuts last year. While the Fed does not directly set mortgage rates, its stance suggests that mortgage rates are unlikely to move dramatically in the near term.
Mike Fratantoni, chief economist at the Mortgage Bankers Association, anticipates that with the Fed’s decision to hold the line, longer-term rates—including mortgage rates—will likely remain within a confined range for the foreseeable future.
Economic and Societal Implications
The continuing high mortgage rates, coupled with a lack of affordable housing options, have profound implications for the U.S. economy and its citizens. For starters, elevated borrowing costs can significantly hinder the ability of first-time homebuyers to enter the market, leading to lower homeownership rates. Homeownership has historically been seen as a cornerstone of wealth accumulation for American families. A decline in homeownership rates could perpetuate wealth inequality, leaving many individuals and families vulnerable to economic fluctuations.
Moreover, stagnant home sales can have ripple effects throughout the economy. The real estate sector is intricately linked to numerous other industries—including construction, home improvement, and retail. A slowdown in home sales may lead to reduced demand for construction materials, appliances, and furnishings, thereby impacting jobs and growth in those sectors.
Additionally, as inventory levels rise due to sluggish sales, home prices may face downward pressure, potentially creating a more favorable environment for buyers in the long run. However, this scenario may also pose challenges for existing homeowners who could see the value of their properties decline, affecting their net worth and financial security.
Overall, the current borrowing landscape is indicative of broader economic conditions, including inflationary pressures and the Fed’s monetary policy. The interplay between interest rates, housing supply, and buyer demand will be critical in shaping the future of the housing market and, by extension, the broader U.S. economy.
