Mortgage rates fall to 6.61% amid signs of slowing inflation

Editor’s note: Freddie Mac, which has tracked weekly average mortgage rates since 1971 and periodically makes changes to its Primary Mortgage Market Survey, changed the source of its data starting November 17, 2022. Instead of surveying lenders, the weekly results will be based on applications received by lenders that are sent to Freddie Mac. Find out more about Freddie Mac̵[ads1]7;s change here.

Mortgage rates fell sharply last week after a series of economic reports indicated that inflation may finally be easing.

The 30-year fixed-rate mortgage averaged 6.61% in the week ended Nov. 17, down from 7.08% the week before, according to Freddie Mac, the biggest weekly drop since 1981. A year ago, the 30-year fixed-rate of 3.10%.

Mortgage rates have risen through most of 2022, spurred by the Federal Reserve’s unprecedented campaign to raise interest rates to curb rising inflation.

Last week, two key inflation reports – the consumer price index and the producer price index – showed that prices rose at a slower pace than expected in October, suggesting that inflation is heading in the right direction, and may even have peaked.

“While the decline in mortgage rates is welcome news, the housing market still has a long way to go,” said Sam Khater, Freddie Mac’s chief economist. “Inflation remains high, the Federal Reserve will likely keep interest rates high and consumers will continue to feel the impact.”

The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey only includes borrowers who put 20% down and have excellent credit. But many buyers who put down less money up front or have less than perfect credit will pay more than the average price.

Investors saw last week’s lower-than-expected CPI data as an indication that the Federal Reserve may make smaller rate hikes in the months ahead, said George Ratiu, Realtor.com’s head of economic research.

Although the Fed does not set the interest rates borrowers pay on mortgages directly, its actions affect them. Mortgage rates tend to follow the yield on 10-year US Treasuries. When investors see or expect interest rate increases, they make moves that generate higher yields and mortgage rates.

“The 10-year Treasury yield fell from 4.15% last Wednesday to 3.68% as capital markets appeared to cheer the drop in inflation as a sign that the Federal Reserve’s monetary tightening is having the intended effect,” Ratiu said.

Although inflation data is moving in the right direction, the Fed has said it does not expect to back off from raising interest rates until inflation approaches its desired 2% target.

Still, the decline in mortgage rates over the past week has brought a sliver of relief to buyers, Ratiu said.

A buyer who bought the median-priced home with a 20% down payment at last week’s average rate of 7.08% faced a monthly payment of about $2,280, according to Realtor.com. At a rate of 6.61%, the same buyer would see their payment drop to $2,174. While $100 in savings a month may not seem like much, over the course of a 30-year loan, the buyer would save close to $48,000 in interest.

Those savings spurred some homebuyers to sweep in and lock in a lower mortgage rate.

Mortgage applications rose for the first time in seven weeks, according to the Mortgage Bankers Association, with both purchase and refinance applications up.

“Signs of slowing inflation pushed mortgage rates below 7% for the first time since mid-October, but with rates still relatively high and affordability correspondingly reduced, the average loan amount is now at its lowest level in nearly two years,” said Bob Broeksmit, president and CEO of the MBA.

Affording a home is still a challenge for many homebuyers. Mortgage rates are expected to remain volatile for the rest of the year. And prices remain high in many areas, especially where there is a very limited inventory of available homes for sale.

Meanwhile, inflation and rising interest rates mean many potential buyers are also facing tight budgets.

“For consumers, rapidly rising prices have put significant financial pressures, especially as inflation erodes any wage gains,” Ratiu said. “The Fed’s interest rate hikes are directly linked to higher interest rates on credit cards and car loans, which, along with higher mortgage debt, add additional burdens to household finances.”

More than 20% of listings have seen price cuts, as sellers adjust their strategy to meet buyers in a changing financial landscape, according to Realtor.com.

“On the one hand, sellers have come to terms with the fact that homes priced for the housing market we experienced when rates were at 3% leave very few buyers able to handle mortgage payments at today’s rates,” Ratiu said. “On the other hand, buyers may be hesitant to move forward with transactions if they find the erratic nature of current mortgage rates unsettling.”

The volatility in mortgage interest rates is not expected to subside in the near future, creating uncertainty for both buyers and sellers.

“With inflation still north of 7% and the Fed committed to continuing to raise the funds rate over the next few months, the mortgage market is not out of the woods,” Ratiu said. “We could still see interest rates rising back above 7% before the end of the year.”