Mortgage rates fall to their lowest since April 2023. Here's where rates could head next.
The Federal Reserve won't make its next rate decision until September 18, but homebuyers are already getting a break on borrowing costs, with the average rate for a 30-year fixed mortgage now at its lowest point since April 2023.
The average rate on the most commonly used home loan dipped to 6.44% for the week ended August 23, the Mortgage Bankers Association said on Wednesday.
With rates declining, more home hunters are applying for mortgages, the MBA said. Cheaper borrowing costs could lure some would-be buyers back into the market after many were priced out by the double whammy of high borrowing costs — mortgage rates sat above 7% earlier this year — and record-high home prices.
Even though the Fed's next rate decision is still weeks away, mortgage rates are already declining because home loans are partially influenced by economic factors, such as the strength of the job market. Recent weak economic data, including an underwhelming July jobs report, have raised concerns that the U.S. economy is showing cracks under the strain of the highest federal funds rate in 23 years.
"Rates have now come down more than 80 basis points from a year ago," or 0.8 percentage points, said Joel Kan, MBA's deputy chief economist.
Still, purchase applications haven't changed much despite the lower rates and higher loan applications, he added. "Prospective homebuyers are staying patient now that rates are moving lower and for-sale inventory has started to increase," Kan said.
Where will mortgage rates go in 2024?
Economists are predicting that the Fed is likely to shave its benchmark rate at its September 18 meeting, although they're divided on whether the central bank will cut rates by 0.25 percentage points or 0.5 percentage points.
Regardless, a rate cut is likely to help revive the housing industry by helping to drive mortgage rates even lower, Moody's Analytics economist Mark Zandi wrote in a Monday research report.
"Rates appear set to fall below 6% in coming months as the Fed cuts interest rates," Zandi said.
Existing homeowners reluctant to sell
Still, one issue is the so-called mortgage rate lock, created when millions of homeowners refinanced their loans during the ultra-low mortgage rates available during the pandemic. Many homeowners locked in rates as low as 3%, which has provided a financial disincentive to sell their homes at a time when the mortgage rates are more than double that.
Even if rates drop below 6%, Zandi pointed out, it is "still higher than most existing homeowners are paying on their mortgages, but it is increasingly clear that rates are not going to fall back to where they were during the pandemic."
Zandi predicted that as rates inch lower, more homeowners will be willing to move, given the demands of life changes such as job changes or growing families.
"It is difficult to know how low mortgage rates must go to entice a homeowner with changed family circumstances to post a for-sale sign, but a rate with a 5% handle is probably sufficient," he noted.