Mortgage rates pulled back further from 7% this week after new government data showed inflation is cooling. Still, rates remain elevated, keeping purchasing conditions tough for homebuyers.
The rate on the 30-year fixed mortgage fell to 6.69% from 6.71% the previous week, according to Freddie Mac. Rates followed a dip in the 10-year Treasury yield, after a softer inflation reading helped to support the Federal Reserve’s decision to pause its interest rate hiking campaign.
While high rates and limited listings are a deterrent from some buyers, opportunistic ones still in the market are ready to jump when rates dip or inventory becomes available in a supply-starved market.
“Affordability and inventory are still an issue. And when they do find something to buy, it's very expensive and financed with fairly high interest rates,” Keith Gumbinger, vice president of HSH.com, told Yahoo Finance. “All part of the Fed’s plan to help slow the economy ultimately, but that doesn’t mean it's going to make for much by way of a robust housing market.”
What the Fed decision means for mortgage rates
This week, the Federal Reserve left its benchmark interest rate at the target range of 5% to 5.25%, marking the central bank’s first pause after 15 months of relentless increases to shunt inflation. The pause could finally give homebuyers a chance to catch their breath.
“I believe that the recent run-up in mortgage rates was due to the unwinding of some positions set in anticipation of the Fed trimming rates later this year in favor of a steady-to-higher expectation,” Gumbinger said, “coupled with the expectation of a slew of new Treasury issuance hitting the market again.”
That means rates shouldn’t increase much more unless something significant happens in the economy, Gumbinger said.
Still, that may not be enough to convince some buyers it's a good time to buy.
“In the mortgage market, consumers may be buoyed by the news that interest rates are holding steady, at least for now,” Michele Raneri, vice president and head of US research and consulting at TransUnion said in a statement. “However, it remains to be seen if, in the short term, this will spur many who have been holding off to finally engage in a new purchase…or if they will continue waiting until rates begin dropping.”
Homebuyers are rate-sensitive
Mortgage demand surged for the first time in a month last week after interest rates dipped, the latest data found, another sign of how rate-sensitive buyers are in today’s market.
The volume of mortgage applications for purchases increased by 8% on a seasonally adjusted basis for the week ending June 14, according to the Mortgage Bankers Association (MBA). Still, the share of purchase applications was 27% lower than the same week a year ago.
“Rates that are still more than a percentage point higher than a year ago and low for-sale inventory continue to constrain homebuying activity in many markets,” MBA Deputy Chief Economist Joel Kan said in a statement.
The MBA also detected a decline in the average loan size, which fell for the third straight week, as first-time buyers continued to make up a larger share of the buyer pool. The challenge, though, for these buyers is finding a home within their budgets.
According to Realtor.com, at least 78% of home shoppers expect to be priced out of the market if home prices and rates keep climbing.
“Though slowing inflation signifies better economic conditions ahead, borrowing, including for a home purchase, is likely to remain expensive for the remainder of the year,” Hannah Jones, Realtor.com’s economic data analyst, said in a statement.
Homeowners are rate-trapped
Reticent homeowners are making the inventory challenges worse. Many don’t want to sell only to buy in an ultra-competitive market with a mortgage rate several times higher than their current one.
Redfin found that 91.8% of homeowners with a mortgage have a rate below 6%. As of the fourth quarter of 2022, 82.4% have a rate below 5%, 62% have a rate below 4%, and 23.5% have a rate under 3%.
Those are far below this week’s rate.
“Homeowners aren’t listing unless they need to,” Monte Miner, real estate agent at Ironwood Fine Properties, told Yahoo Finance.
Currently, there are 433,000 single-family homes on the market for the week ending June 12, Altos Research found, up 1.5% from the week prior and just 11.7% more than a year ago. But available inventory is shrinking fast.
“By July we’ll have a negative year-over-year inventory change. Fewer homes on the market than last year,” Mike Simonsen, founder of Altos Research wrote in a blog. “I suppose this will hold true as long as mortgage rates don’t spike again over 7%.”
Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
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