Mortgage rates fell this week following a three-week rise, as rates remain volatile in the face of contradictory economic signs.
According to Freddie Mac data issued Thursday, the 30-year fixed-rate mortgage averaged 6.71% in the week ending June 8, down from 6.79% the previous week. The 30-year fixed rate was 5.23% a year ago.
“While elevated rates and other affordability challenges remain, inventory continues to be the biggest obstacle for prospective homebuyers,” said Sam Khater, Freddie Mac’s chief economist.
With interest rates significantly higher than the fixed rate into which many existing homeowners bought or refinanced, they are hesitant to put their houses on the market and trade their ultra-low interest rate for something much higher. As a result, there is a scarcity of available homes to purchase.
Mortgage rates surpassed 5% for the first time since 2011, a little more than a year ago, and have remained above 5% for all but one week this year. Since then, they have risen to a high of 7.08%, which was last seen in November. Rates have fluctuated since mid-March, but have remained below 6.5% until last week.
The average mortgage rate is calculated using mortgage applications received by Freddie Mac from thousands of lenders around the country. The poll only includes borrowers who put down 20% and have outstanding credit.
All eyes on the Fed
Mortgage rates are fluctuating on a daily basis due to economic volatility and uncertainty, according to Jiayi Xu, an economist at Realtor.com, and have risen in line with the trend of 10-year Treasury yields as investors assess the possible direction of Federal Reserve interest rate policy at its meeting next week.
According to Xu, Federal Reserve members indicated delaying a rate hike in June in speeches last week, allowing the Fed to gather more data before making any decisions. While the remarks are not official policy, she claims that “by phrasing the conversation in terms of “skipping” rather than “pausing,” policymakers “are signaling that the present interest rate may not have reached its peak for this particular economic cycle.”
The Fed does not directly set mortgage interest rates, but its activities have an impact on them. Mortgage rates tend to reflect the yield on 10-year US Treasuries, which fluctuate based on a combination of the Fed’s actions, what the Fed actually does, and investor reactions. When Treasury yields rise, mortgage rates tend to fall; when they fall, mortgage rates tend to rise.
More hikes may be necessary to cool inflation and the hot job market.
“May’s jobs report reflected another month of stronger employment activity with higher-than-expected net new jobs added to the market,” said Xu. “However, the simultaneous rise in the unemployment rate in May showed mixed signals in the labor market, indicating the complexities involved in interpreting economic data and introducing uncertainties in the upcoming Federal Reserve policy decisions.”
Xu added: “While the potential for another rate hike raises the prospect of increased mortgage rates, the objective of curbing inflation will ultimately lead to a decline in mortgage rates, bringing much-desired stability to the market.”
Mortgage applications decrease
Home buyers remain sensitive to mortgage rate spikes, with mortgage applications dropping last week, according to the Mortgage Bankers Association.
“The housing market has gotten off to a slow start this summer due to higher mortgage rates, low inventory, and economic uncertainty,” said Bob Broeksmit, MBA president and CEO. “The labor market continues to be exceptionally strong, which could bring more buyers back into the market once rates move away from their recent highs.”
But they’ll have to come down significantly before some home buyers get in the market.
The most common mortgage rate that is cited as comfortable for potential buyers constrained by finances was between 3% and 3.25% — less than half of today’s level — according to a new survey by Realtor.com and Census wide.
“Even for individuals with plans to purchase within the next year, almost 80% of them expressed concerns about being priced out of the market if housing prices and mortgage rates continue to rise,” said Xu. “Consequently, affordability will play a crucial role in helping them achieve their goal of purchasing a home.”