US mortgage rates drop after five weeks of hike, but remain above 7%

Washington, DC

US mortgage interest rates fell this week, ending a five-week period of increases, but remained above 7% amid persistent inflation.

The average 30-year fixed-rate mortgage was 7.18% in the week ended Aug. 31, down from 7.23% in the previous week, according to data from Freddie Mac released Thursday. A year ago, the 30-year fixed rate was 5.66%.

“Recent volatility makes it difficult to predict where interest rates will go next, but we should have a better gauge in September as the Fed outlines its next steps in terms of rate hikes,” said Sam Khater, chief economist at Freddie Mac.

Mortgage rates soared during the Fed’s historic campaign to rein in inflation, sending housing affordability down to its lowest level in nearly four decades. It is more expensive to buy a home because of the additional cost of mortgage financing and higher house prices.

Home prices have risen because the number of homes available on the market for purchase has historically been lower. Homeowners who previously locked in at low prices are reluctant to sell now that prices have risen.

The combination of low inventory and rising costs put pressure on potential homebuyers and drove home sales down from a year ago.

The economy remains strong, with interest rates remaining higher

Inflation remains well above the Fed’s 2% target, which is keeping interest rates high. The bond market worries that taming inflation may require more rate hikes. The central bank has three policy meetings remaining this year.

Fed Chairman Jerome Powell emphasized the importance of the core PCE price index to the future path of interest rate hikes.

The latest report, released earlier Thursday, indicated that the monthly gain for July of just 0.2% was more in line with where the Fed would like to see inflation. However, core inflation remained high year-on-year in July, at 4.2%.

This means borrowers can expect costs to remain high in the near term.

Although the Fed does not directly set the interest rates that mortgage borrowers pay, its actions affect them. Mortgage rates tend to track the yield on 10-year US Treasury bonds, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does, and investors’ reactions. When Treasury yields rise, so do mortgage rates; When they fall, mortgage rates tend to follow.

The summer selling season usually ends in August. But it’s a lot quieter than usual this year because affordability is so low.

“The challenging combination of a high 20-year mortgage rate and limited home inventory creates an unfavorable environment for today’s homebuyers,” said Jiayi Xu, economist.

But when prices started to drop a bit, some buyers exited. Mortgage applications rose from their lowest level in 28 years, according to the Mortgage Bankers Association.

“The last week of August ended on a positive note, with mortgage applications for home purchases and refinancing increasing for the first time in five weeks,” said Bob Broxsmith, MBA President and CEO. “MBA expects prices to come down in the coming months, which should help improve affordability a bit.”

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