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Mortgage Rates Hit Yearly Low Sparking Hopes but High Prices Still Loom

AInvestThursday, Aug 22, 2024 1:00 pm ET
2min read
Mortgage rates in the United States have resumed their downward trend, reaching a new yearly low. According to a statement from Freddie Mac on Thursday, the average rate for a 30-year fixed-rate mortgage fell to 6.46%, down from last week's 6.49%. This significant reduction in borrowing costs, which had previously exceeded 7% earlier this year, has increased buyer affordability and prompted some potential buyers to move away from the sidelines.

The National Association of Realtors (NAR) reported that July saw a month-over-month increase of 1.3% in existing home sales, marking the first rise in five months. However, this growth still reflects the slowest July sales pace since 2010, highlighting the ongoing challenges posed by high home prices and a shortage of affordable housing. Buyers and sellers may be awaiting further declines in financing costs before making any decisions.

Freddie Mac's Chief Economist, Sam Khater, noted in the statement that while the recent dip in rates to just below 6.5% is notable, it might not be enough to significantly stimulate potential homebuyer demand. Khater indicated that another percentage point decrease might be necessary to drive a stronger buying interest.

Despite the more favorable mortgage rates due to the anticipated easing of monetary policy by the Federal Reserve, rising home prices have continued to dampen housing affordability. An index measuring U.S. home purchase mortgage applications dropped last week to its lowest level since February, indicating that higher home prices are offsetting the benefits of lower mortgage rates on demand. Specifically, for the week ending August 16, the Mortgage Bankers Association (MBA) reported a 5.2% drop in its Purchasing Mortgage Applications Index to 130.6. Refinance applications also saw a decline after a surge to a two-year high the previous week.

The Federal Reserve's July monetary policy meeting minutes, released on the 21st, suggest that if inflation and other economic data continue to align with expectations, the Fed might consider lowering interest rates in its September meeting. Although the Fed decided to maintain the federal funds rate target range at 5.25% to 5.5%, almost all participants in the meeting indicated that more data is required to confirm that inflation is persistently moving towards the 2% target before making any rate cuts.

The minutes further showed that factors such as reduced business pricing power, slower economic growth, and dwindling excess household savings from the pandemic have recently contributed to lowering U.S. inflation. These factors are expected to continue exerting downward pressure on inflation in the coming months. Most participants concurred that if the data trajectory remains as expected, easing monetary policy could be appropriate in the next meeting.

Moreover, the U.S. economy's actual gross domestic product growth slowed in the first half of this year compared to the latter half of the previous year. Consumer spending growth has also decelerated relative to last year, reflecting a weakened labor market and a slower pace of income growth. As of the evening of the 21st, the CME Group’s FedWatch tool indicated a 65% probability of a 25 basis point cut and a 35% probability of a 50 basis point cut at the Fed's September 17-18 policy meeting.
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