This week saw a rise in the average rate on a 30-year mortgage, marking the first increase since late May and elevating home loan borrowing costs. According to Freddie Mac, the rate ascended to 6.95% from 6.86% the previous week, compared to an average of 6.81% a year ago. This uptick follows a four-week decline in the average rate, which has largely fluctuated around 7% throughout the year. Increased rates can add substantial monthly costs for borrowers, further dampening home sales, which have been sluggish since 2022.
Borrowing costs for 15-year fixed-rate mortgages, favoured by homeowners refinancing them, also rose, with the average rate increasing to 6.25% from 6.16% last week. A year ago, the rate stood at 6.24%, Freddie Mac reported. Several factors influence mortgage rates, including the bond market’s response to the Federal Reserve’s interest rate policy and movements in the 10-year Treasury yield, which guides lenders in pricing home loans. The yield, which exceeded 4.7% in late April, has generally been declining, fueled by hopes that slowing inflation will prompt the Fed to lower its main interest rate, now at its highest in over two decades.
Fed officials have indicated that inflation has moved closer to their target level of 2% in recent months. They have signalled their expectation of cutting the central bank’s benchmark rate once this year. However, until the Fed begins reducing its short-term rate, long-term mortgage rates are unlikely to decrease significantly. Many economists foresee the Fed’s first rate cut occurring in September, potentially followed by another by the year’s end. Lisa Sturtevant, chief economist at Bright MLS, noted that if bond yields decline in anticipation of a Fed rate cut, mortgage rates could begin to ease in the coming weeks. She noted that although today’s report may disappoint homebuyers, there is a possibility that rates will begin to fall sooner than anticipated.
During the pandemic, mortgage rates fell to historic lows, sparking a home buying interest and driving prices up over 43% from 2019 to 2023. Despite declining sales this year, May saw home prices reach an all-time high of USD 419,300. High borrowing costs and record prices have deterred many potential buyers this spring. Sales of previously occupied U.S. homes declined for the third consecutive month in May, with indications suggesting a similar downturn in June. Most economists predict that the average rate on a 30-year home loan will remain above 6% throughout the year, which is still double the average rate from three years ago.
Sam Khater, Freddie Mac’s chief economist, expressed cautious optimism, expecting rates to moderately decrease in the second half of the year. With additional inventory, price growth should slow, benefiting potential homebuyers. In summary, the recent rise in mortgage rates highlights the ongoing challenges in the housing market, where elevated borrowing costs and high home prices continue to impede sales. However, anticipated Fed rate cuts and potential decreases in bond yields could provide some relief to homebuyers in the near future.
