Mortgage rates have fallen to their lowest level since May 2023, according to the latest report from the Mortgage Bankers Association.
The MBA report indicated that mortgage rates fell last week to 6.55%.
Would-be homebuyers have faced painful mortgage rates for years now, so the downward shift is a silver lining for the flailing housing market.
Additionally, the market composite index, a measure of mortgage loan application volume, increased 6.9% on a seasonally adjusted basis from the previous week, a sign that the lower mortgage rates have lured some back into the housing market.
“Mortgage rates decreased across the board last week and mortgage application volume reached its highest level since January of this year,” said Joel Kan, MBA’s vice president and deputy chief economist. “Despite the downward movement in rates, purchase activity only saw small gains, with an increase in conventional purchase applications offset by decreases in government purchase applications.
“For-sale inventory is beginning to increase gradually in some parts of the country and homebuyers might be biding their time to enter the market given the prospect of lower rates,” Kan added.
The recent decline in mortgage rates comes after they peaked this year at about 7.40% in April. They have gradually slid lower since then as the Federal Reserve eyes its first interest rate cuts.
Mortgage rates are affected by the Fed’s monetary policy. They tend to go down when it appears the Fed is poised to change its interest rate target. And after a lackluster jobs report last week, investors now think the Fed will make a big cut at its next meeting in September. Some are even suggesting the Fed convene an emergency meeting to cut rates.
The economy added 114,000 jobs in July, far fewer than expected, and the unemployment rate rose two-tenths of a percentage point to 4.3%, the Bureau of Labor Statistics reported last Friday.
The report also triggered a recession indicator called the Sahm rule. That is when the three-month moving average of the unemployment rate rises half a percentage point relative to its minimum point over the past year. The indicator has signaled the start of all post-war recessions.
The stock market plunged in response to the report, with some investors and economists theorizing that the Fed held rates too high for too long. The stock market incurred further losses Monday but has since recovered somewhat.
When the Fed conducts monetary policy, it typically moves rates gradually by a quarter of a percentage point each meeting. But the surprising jobs report is putting pressure on the central bank and Chairman Jerome Powell for an outsize rate revision.
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Investors are now all but certain that the Fed will cut rates in September, putting the odds of a half-percentage-point hike at over 63%, according to the CME Group’s FedWatch tool , which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
If more data come in showing the labor market is quickly weakening, it could force the Fed’s hand to cut more. That would put downward pressure on mortgage rates and be good for homebuyers, although the trade-off is that unemployment likely would rise as well in such a scenario, which means there might be less demand in the housing market.
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