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The interest rate for the most popular U.S. home loan plunged last week to its lowest level in 15 months. This happened after the Federal Reserve hinted it could start cutting its policy rate in September. Additionally, weak job market data boosted financial market bets that borrowing costs would be reduced significantly.
The average contract rate on a US 30-year Mortgage fell 27 basis points in the week ended Aug. 2, bringing it down to 6.55%, according to the Mortgage Bankers Association. This is the lowest rate since May 2023 and marks the sharpest drop in almost two years.
This decline offers potential homebuyers some relief in what has become an increasingly unaffordable housing market. In recent years, both home prices and borrowing costs have risen significantly.
The unaffordability was also highlighted in the July housing sentiment index from Fannie Mae, the government-sponsored mortgage finance company. Only 17% of respondents said it was a good time to buy a home, down from 19% in June. Moreover, 35% said they would rent their next residence rather than buy it, the highest share since 2011.
Doug Duncan, chief economist at Fannie Mae, commented on the sentiment index: “Right now, it’s difficult to tell if this reflects simple buyer fatigue or a greater sense of disenchantment with the market, but we think it could have important implications should the trend continue.”
US 30-Year Mortgage: Refinance Wave Begins
The drop in interest rates also presents an opportunity for those who bought homes when rates were higher to refinance and reduce their payments. The US 30-year mortgage rate peaked at 7.9% last October.
Refinancing applications rose sharply to the highest level in two years, as reported by the MBA. This increase helped lift the refinance share of overall loan application volumes to 41.7%, the highest level since the week of the Fed’s first rate hike in March 2022. However, purchase activity edged up less than 1%, constrained by a low inventory of homes for sale that has driven up prices.
The Federal Reserve’s aggressive inflation-fighting rate-hike campaign in 2022 and 2023 drove borrowing costs to their highest levels in decades. Last week, the Fed signaled that cooling price pressures and a slowing labor market might justify a policy rate cut as soon as next month. The U.S. central bank has kept its policy rate in the 5.25%-5.50% range for more than a year.
Two days after the Fed’s last policy meeting, the Labor Department’s monthly jobs report showed that the U.S. unemployment rate had jumped to 4.3% in July and hiring had slowed, raising fears that a recession is imminent or perhaps even underway. These fears set off a slide in equities that affected global markets into Monday before stocks recovered somewhat on Tuesday. Major U.S. stock indices were trading higher again on Wednesday.
US 30-Year Mortgage: Impact on Financial Markets
Last week’s labor market data also triggered a rally in the U.S. Treasuries, lowering their yields – which move inversely to bond prices – and pulling closely linked mortgage rates down along with them. This is a silver lining for millions of U.S. households on the hunt for new homes, cheaper housing, or both.
While the Fed left rates steady at its July meeting, its post-meeting policy statement showed it was now just as focused on the health of the labor market as on bringing down inflation. San Francisco Fed President Mary Daly noted that this shift in communication has already led to lower mortgage rates as investors anticipate the central bank’s next move. “You already see policy working, even before we cut the rate,” she said.
More than 4 million mortgages originated since 2022 have interest rates of 6.5% or higher, according to Intercontinental Exchange’s ICE Mortgage Monitor. However, more than six in 10 mortgages have rates below 4%, according to data from Freddie Mac. This suggests that for a large fraction of homeowners, mortgage rates would need to drop far more to make the cost of refinancing worthwhile or to entice them to buy a new home and put their current one on the market.
The recent drop in the US 30-year mortgage rate is a welcome relief for potential homebuyers and those looking to refinance. With the Federal Reserve hinting at possible rate cuts and the labor market showing signs of slowing, the housing market could see more favorable conditions in the coming months.
For more news and updates on the US 30-year Mortgage and financial market, stay tuned to TurkishNY Radio.
