Mortgage rates in the U.S. have declined for the third consecutive week, reaching their lowest point since early April, which provides some relief to the country’s strained housing market. Freddie Mac reported on Thursday that the average rate for a standard 30-year fixed-rate mortgage dropped to 6.87% for the week ending June 20, down from 6.95% the previous week and significantly lower than the peak of 7.22% earlier in 2024.
Factors Influencing the Decline
The fall in mortgage rates is attributed to signs of cooling inflation and market expectations of a future rate cut by the Federal Reserve. Sam Khater, Freddie Mac’s chief economist, noted that the combination of lower mortgage rates and an improving housing supply could positively impact the housing market.
Current Mortgage Rate Context
Despite the recent declines, mortgage rates remain significantly higher than pre-2022 levels. The Federal Reserve’s interest rate hikes over the past two years have led to higher borrowing costs. Although there is some anticipation of easing rates this year, substantial decreases are unlikely. Fed officials have projected only one rate cut for 2024, down from the three initially forecasted. The Federal Reserve’s policies indirectly affect mortgage rates through the benchmark 10-year U.S. Treasury yield, which responds to the Fed’s policy actions. Consequently, economists do not expect average mortgage rates to fall below 6% this year.
Impact on Homebuilding and Housing Market
The high-interest rate environment continues to constrain the U.S. housing market, affecting new home construction. Government statistics revealed that new home construction in May fell to an annual rate of 1.28 million units, the lowest since 2020, and significantly below expectations. Building permits also lagged behind economists’ projections, suggesting future construction may remain weak. Additionally, the National Association of Home Builders/Wells Fargo Housing Market Index indicated a drop in homebuilder sentiment to its lowest level since December.
Carl Harris, NAHB Chairman, pointed out that persistently high mortgage rates are discouraging many potential buyers, while homebuilders face challenges such as higher rates for construction loans, labor shortages, and a lack of buildable lots.
Housing Inventory and Affordability
The shortage of homes on the market remains a significant issue. Although housing inventory has seen some improvement as more Americans sell their homes, home prices remain prohibitively high. The S&P CoreLogic Case-Shiller U.S. National Home Price Index reported a 6.5% increase in home prices in March compared to the previous year, setting a new record high for the sixth time in the past year. Major urban areas like San Diego, Los Angeles, and New York have seen particularly strong demand and rising prices.
Challenges for Homebuyers
High home prices and substantial down payment requirements exacerbate the affordability crisis. According to Zillow, a median-income household would need to save over $127,000 for a down payment on a typical U.S. home, an amount roughly double the median salary of a U.S. worker. Skylar Olsen, chief economist at Zillow, highlighted that saving such an amount is challenging without additional financial support, prompting some buyers to consider co-buying or renting out extra rooms to manage costs.
In summary, while falling mortgage rates offer some relief, the broader challenges of high home prices, constrained homebuilding, and significant down payment requirements continue to make the U.S. housing market unaffordable for many.