Mortgage Rates Decline Slightly, but Remain Elevated
The average rate on a 30-year fixed mortgage in the U.S. has decreased for the third consecutive week, providing some relief for prospective homebuyers entering the market before the spring homebuying season. Freddie Mac reported on Thursday that the average rate dropped from 6.95% to 6.89%. A year ago, the average was 6.64%.
Borrowing costs for 15-year fixed-rate mortgages, often used by homeowners seeking to refinance at a lower rate, also fell this week. The average rate declined from 6.12% to 6.05%. This compares to an average of 5.9% a year ago.
Mortgage rates are influenced by various factors, including the bond market's response to the Federal Reserve's interest rate decisions. The average 30-year mortgage rate briefly dipped to just above 6% last September, but has since mostly trended upwards, mirroring a sharp increase in the 10-year Treasury yield. Lenders use this yield as a benchmark for pricing home loans. This yield, which stood at 3.62% in mid-September, spiked to 4.79% three weeks ago due to concerns that inflation would remain above the Fed's target of 2%. A strong U.S. economy and apprehensions about potential tariffs and policies under President Donald Trump have also contributed to higher bond yields. On Thursday at midday, the 10-year Treasury yield was at 4.43%.
Elevated mortgage rates, which can add significantly to monthly borrowing costs, have deterred homebuyers, exacerbating a nationwide decline in home sales that began in 2022. Although sales of previously occupied homes increased in December for the third straight month, 2023 was the weakest year for home sales in nearly 30 years, surpassing 2022, which was previously the weakest year in decades. Pending home sales data suggests the possibility of further declines in the coming months. The National Association of Realtors' pending home sales index fell by 5.5% in December compared to the previous month, ending a four-month period of gains. There is typically a lag of one to two months between when a contract is signed and when the sale is finalized, making pending home sales an indicator of future completed sales.
Economists believe it is unlikely that mortgage rates will experience a significant decline. Forecasts generally anticipate the average 30-year mortgage rate to remain above 6% for the remainder of the year, with some economists predicting an upper range of up to 6.8%. After a series of three consecutive rate cuts to conclude 2023, the Federal Reserve left its benchmark interest rate unchanged last week, indicating a more cautious approach as the Fed assesses the path of inflation and the Trump administration's upcoming policies.