Rates fall below 7%, driving momentum in the market

The seventh straight week of mortgage interest declines has led to more holiday season homebuying activity.

By Dave Gallagher, Real Estate News Article link

Key points:

  • The 30-year fixed-rate mortgage averaged 6.95% this week, dropping below 7% for the first time since August.
  • The change in tone from the Federal Reserve, which is now signaling rate cuts in 2024, is a key factor. 
  • Both purchase and refinance activity have jumped following the decline in rates from their October peak.

Mortgage interest rates hit a key psychological milestone this week, falling below 7% for the first time in more than four months.

The 30-year fixed-rate mortgage averaged 6.95%, according to the latest Freddie Mac survey. That's down from 7.03% last week and marks the seventh straight week of declines. The 15-year fixed-rate mortgage ticked up, however, halting its downward streak. It's now at 6.38%.

The drop in the 30-year rate is welcome news to potential homebuyers who hope to see this trend continue.

"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," said Sam Khater, Freddie Mac's chief economist.

The combo of lower rates and some fresh inventory has prompted buyers to jump into the market, said Lisa Sturtevant, Bright MLS' chief economist.

"With rates falling and new listing activity up, expect that the unusually busy December market will continue into January as some buyers and sellers will be out there trying to beat others before the spring market," Sturtevant said.

The Fed signals a change in policy

A different tone from the Federal Reserve is contributing to the increased buyer optimism. On Dec. 13, Chairman Jerome Powell acknowledged that rates are at or near their peak in this current cycle, and the board held off on raising short-term interest rates, as expected. 

But Fed members went a step further, signaling that cuts could be on the way, with the majority surveyed forecasting three cuts that would trim rates by around 75 basis points in 2024.

Rate cuts are usually a sign that the overall economy is performing poorly, but when questioned during a press conference Wednesday, Powell said cuts are also a way of reducing the constraints currently on the economy. He added that the Fed is aware of the risk of pushing rates too high and said they may start making cuts before inflation reaches 2%.

Median home payment lowest in 8 months

The recent drop in mortgage interest rates has made a significant impact on monthly payments, according to a new Redfin report. The median U.S. housing payment for the four weeks ending Dec. 10 was $2,503, down $233 from October's record high and at its lowest point since April. 

But home prices keep rising, jumping 4.5% year-over-year as demand continues to outpace supply, according to the Redfin report. Even with the recent increase in new listings, overall inventory is still down year-over-year.

Application activity continues to pick up

With seven straight weeks of mortgage interest rate declines, more borrowers are applying for home loans. The Mortgage Bankers Association estimates in its latest survey that overall mortgage applications have increased 7.4% compared to a week before. And a big driver has been refinancing applications as rates have fallen from around 8% to under 7%, said Mike Fratantoni, MBA's chief economist.

While increasing in recent weeks, purchase applications remain 18% below last year due to limited inventory, Fratantoni said.

Contact us for the latest rates and to find out how to start the homebuying process.

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