In a significant shift, mortgage rates have dipped into the 6% range for the first time since August, sparking optimism among housing economists who anticipate a sustained downward trend. Freddie Mac reported on Thursday that the average rate on a 30-year mortgage has fallen to 6.95%, down from 7.03% the previous week, marking the seventh consecutive week of declines and reaching the lowest level since early August when rates stood at 6.96%.
The housing market, plagued by sluggishness and high costs over the past 12 months, is expected to receive a boost from these developments. Housing experts attribute the decline in rates to favorable overall inflation data, prompting predictions of near-future rate cuts that could bring mortgage rates closer to the coveted 6% mark. Sam Khater, Chief Economist at Freddie Mac, expressed optimism about the housing market’s prospects, stating, “Given inflation continues to decelerate and the Federal Reserve Board’s current expectations that they will lower the federal funds target rate next year, we likely will see a gradual thawing of the housing market in the new year.”
The latest Consumer Price Index (CPI) data, revealing a moderated inflation rate of 3.1% year-over-year in November, aligns with the Federal Reserve’s goal of achieving a 2% inflation rate. This positive economic indicator is anticipated to further contribute to easing financial pressures on the housing market.
Since the surge in financing rates during the summer, the housing market has been mired in a gridlock, with homeowners reluctant to sell to maintain low-interest rates, and potential buyers deterred by increased financing costs. This has resulted in the lowest pending home transaction volume in two decades, as highlighted by Federal Reserve Chair Jerome Powell in a recent Federal Open Market Committee (FOMC) meeting: “After picking up somewhat over the summer, activity in the housing sector has flattened out and remains well below the levels of a year ago, largely reflecting higher mortgage rates.”
However, there is optimism that this trend may soon reverse. Housing experts foresee rate cuts in 2024, with Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), suggesting that the Federal Reserve could initiate reductions as early as spring. Yun believes these cuts could potentially amount to a 100 basis points reduction by the end of next year, bringing average mortgage rates down to around 6.3%.
Danielle Hale, Chief Economist at Realtor.com, emphasized the potential impact of rates falling below 6%, stating, “I think we’ll see a bigger uptick in housing demand if mortgage rates were to fall into the 5s because that will reduce the strength of the lock-in effect for a greater share of homeowners.”
The Federal Reserve’s recent signals indicate a commitment to lower rates in the future. Fed Chair Jerome Powell, while proceeding cautiously, projected rates to drop to 4.6% by the end of 2024 if the economy evolves as anticipated. Another forecast suggested a 0.50% cut in interest rates in the coming year, driven by falling inflation and a slowing labor market.
Despite overall inflation deceleration, the housing component of the Consumer Price Index remains elevated, with housing prices and rent climbing 0.4% monthly and 6.5% annually in November. Shelter inflation, comprising one-third of overall CPI, accounted for nearly 70% of the total increase in all items less food and energy in November, according to the Bureau of Labor Statistics.
While government data shows a 6.9% annual increase in rent, Yun refuted this, citing private sector rental data showing only a 1% to 2% increase. He emphasized an oversupply of apartments in various regions, challenging the accuracy of the government’s higher figures and suggesting that it may be time for interest rate cuts based on more accurate private sector data.
In conclusion, the recent shift in mortgage rates entering the 6% range signals a potential turning point for the housing market, offering renewed hope for both homeowners and prospective buyers in the coming months.
Source: Yahoo Finance
