Mortgage rates fell slightly this week, remaining nearly flat ahead of the Federal Reserve’s closely watched interest rate setting meeting next week.
The 30-year fixed-rate mortgage averaged 6.13% in the week ending Jan. 26, down from 6.15% the previous week, according to Freddie Mac data released Thursday. A year ago, the 30-year fixed rate was 3.55%.
“Mortgage rates continue to fall and as a result demand for home purchases is thawing after the months-long freeze that gripped the housing market,” said Sam Khater, chief economist at Freddie Mac. “Potential buyers remain sensitive to changes in mortgage rates, but significant demand remains, fueled by first-time home buyers.”
After climbing for most of 2022, spurred by sharp interest rate hikes from the Fed to rein in soaring inflation, mortgage rates have trended lower since November, alongside data that continues to show that inflation may have peaked. Mortgage rates last week hit their lowest level since September.
The average mortgage rate is based on the mortgage applications Freddie Mac receives from thousands of lenders across the country. The survey only includes borrowers who have a 20% down payment and have excellent credit. Many buyers who put less money up front or have less than ideal credit will pay more than the average rate.
The Fed is expected to continue its rate hike campaign at its two-day meeting from January 31 to February 1. The central bank is expected to announce a smaller increase in the federal funds rate, with a quarter-point hike, compared to the half-point and three-quarter-point increases at meetings last year.
The Fed does not directly set the interest rates that borrowers pay on mortgages. But his actions influence them. Mortgage rates tend to follow the yield of 10-year US Treasury bonds, which move based on a combination of anticipation of Fed actions, what the Fed is actually doing, and investor reactions.
When Treasury yields rise, mortgage rates also rise; when they fall, mortgage rates tend to follow.
“The Freddie Mac fixed rate for a 30-year loan rebounded slightly this week, following the trajectory of the 10-year Treasury,” said Jiayi Xu, an economist at Realtor.com. “As companies and investors watch the market closely, the recent large-scale layoffs in the tech sector combined with Monday’s stock market rebound have created mixed signals.”
On the one hand, she said, many energy-guzzling tech companies are grappling with Fed rate hikes. On the other hand, investors are welcoming the slowdown in inflation and anticipate that interest rate hikes may begin to ease or stabilize in the coming months.
Economic indicators like low unemployment and slowing inflation rate do not point to a recession, Xu said. “However, it is important to keep in mind that monetary policy takes time to have an impact, and these economic indicators may not yet show the full effects of restrictive policy,” she said.
While the Fed could continue to raise rates this year, Xu said, the slower pace will help create a soft landing for the economy by balancing the risks of lowering inflation without pushing up the unemployment rate.
“Despite slowing inflation, the expected ongoing tight monetary policy could keep mortgage rates in the 6% to 7% range in the near term,” she said.
The downward trend in mortgage rates since November has had a positive impact on home affordability for mortgage borrowers.
Homebuyer affordability improved in December, with the national median payment falling 2.9% to $1,920 from $1,977 in November, according to the Mortgage Bankers Association.
Many buyers are taking advantage of the relatively lower rates of recent weeks: Mortgage applications rose 7% last week compared to the previous week, according to MBA.
“Borrower demand, driven by lower mortgage rates, continues to rise into early 2023,” said Bob Broeksmit, MBA President and CEO. “Mortgage applications rose for the third week in a row. Buying demand is still below levels of a year ago, but lower rates and improved affordability are favorable developments for the housing market as spring approaches.
Buyer traffic is increasing in many markets, even though inventory is slow to improve.
“High costs and worries about economic uncertainty caused many buyers to put buying decisions on hold and led to fewer transactions,” Xu said. “However, the decrease in competition may have presented opportunities for some first-time home buyers.”