US Mortgage Rates Fall to 6.94%, First Dip Below 7% Since April

Key Takeaway

• US mortgage rates fell to 6.94%, the first dip below 7% since early April, marking three consecutive weeks of decline.
• High mortgage rates and rising home prices continue to weigh on sales, with existing-home transactions falling for a second month in April.
• Increased housing inventory and lower rates could provide relief, but further rate drops depend on consistent inflation reduction toward the Fed's 2% target.

Mortgage Rates Decline

Mortgage rates in the U.S. have dipped below 7% for the first time in over a month, with the average rate for a 30-year fixed loan falling to 6.94% from 7.02% last week, according to Freddie Mac. This marks the third consecutive week of declines, providing a modest boost for homebuyers navigating a challenging housing market characterized by high prices and limited inventory. The recent easing of rates is a welcome development, especially during a time of year when the market typically heats up due to warmer weather drawing more people to open houses.

Impact on Home Sales

Despite the decline in mortgage rates, the housing market remains under pressure. Transactions for previously owned homes fell in April for the second straight month, and new home sales also saw a decline. The high mortgage rates, which had hovered close to 7%, coupled with rising home prices, have made it difficult for many buyers to afford properties. However, the recent downward trend in rates and an increase in the inventory of homes for sale may offer some relief. "Greater supply coupled with the recent downward trend in rates is an encouraging sign for the housing market," said Sam Khater, Freddie Mac’s chief economist.

Mortgage Applications Rise

The decrease in mortgage rates has led to an uptick in mortgage applications. Data from the Mortgage Bankers Association (MBA) showed a 1.9% increase in mortgage applications for the week ending May 17, continuing an upward trend following a 0.5% rise the previous week. This marks the third consecutive week of growth in mortgage demand. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances decreased by 7 basis points to 7.01% during the week ending May 17. Refinancing applications, which are highly sensitive to changes in interest rates, surged by 7%, building on a 5% increase the previous week. This significant rise in refinancing applications compensated for a 1% decline in mortgage applications for home purchases, reflecting ongoing challenges such as limited housing supply and intense market competition.

Federal Reserve's Role

The Federal Reserve's timing on rate cuts will largely depend on how the economy fares. Earlier this month, policymakers agreed that interest rates needed to be higher for longer, while "many" questioned whether policy was restrictive enough to tame inflation to the Fed’s target, according to minutes released this week. "For rates to fall further below 7%, there must be consistent evidence that inflation is on track to return to 2%," said Jiayi Xu, a Realtor.com economist. Treasury yields, which influence mortgage rates, have largely been easing since Federal Reserve Chair Jerome Powell indicated that the central bank is closer to cutting its main interest rate than hiking it. However, the Fed has maintained that it doesn’t plan to cut interest rates until it has greater confidence that price increases are slowing sustainably to its 2% target.

Street Views

• Sam Khater, Freddie Mac (Cautiously Optimistic on the housing market):

  "Greater supply coupled with the recent downward trend in rates is an encouraging sign for the housing market."

• Jiayi Xu, Realtor.com (Neutral on mortgage rates and inflation):

  "For rates to fall further below 7%, there must be consistent evidence that inflation is on track to return to 2%."