Mortgage rates have fallen to their lowest level since early April, providing some relief to America’s increasingly unaffordable housing market. The 30-year fixed-rate mortgage averaged 6.87% for the week ending June 20, down from last week’s 6.95%, according to mortgage financing giant Freddie Mac. This marks the third consecutive weekly decline and a drop from a 2024 peak of 7.22%.
“Mortgage rates fell for the third straight week following signs of cooling inflation and market expectations of a future Federal Reserve rate cut,” said Sam Khater, Freddie Mac’s chief economist. “These lower mortgage rates, coupled with the gradually improving housing supply, bode well for the housing market.”
Historical Context and Projections
Despite the recent declines, mortgage rates remain higher than at any point in the decade before 2022, when the Federal Reserve began raising interest rates to combat inflation. While borrowing costs are expected to ease this year, significant reductions are unlikely. The Fed has projected only one interest rate cut for this year, compared to the three forecasted in March. Although the Fed doesn’t directly set mortgage rates, its actions influence them through the benchmark 10-year US Treasury yield, which moves in anticipation of the Fed’s policy moves. Economists do not expect the average mortgage rate to fall below 6% this year.
Impact on Homebuilding and Market Conditions
High interest rates continue to constrain the US housing market, affecting homebuilding activities. New home construction was much weaker than expected in May, with a seasonally adjusted annual rate of 1.28 million units, the lowest level since 2020 and down by 5.5% from April. This was significantly below the 1% gain projected by economists in a FactSet poll.
Building permits, a forward indicator of future construction, also fell short of expectations. Additionally, sentiment among America’s homebuilders dropped to its lowest level since December, according to the National Association of Home Builders/Wells Fargo Housing Market Index.
“Persistently high mortgage rates are keeping many prospective buyers on the sidelines,” said NAHB Chairman Carl Harris. “Home builders are also dealing with higher rates for construction and development loans, chronic labor shortages, and a dearth of buildable lots.”
Housing Inventory and Home Prices
A lack of available homes has been a longstanding issue in the US housing market. While recent months have seen some improvement in housing inventory, the overall supply remains insufficient. Home prices continue to be a significant factor in the affordability crisis. The S&P CoreLogic Case-Shiller US National Home Price Index rose 6.5% in March from a year earlier to a record high, driven by strong demand in urban centers such as San Diego, Los Angeles, and New York. This was the sixth time the index reached a new record high over the past year.
The annual Demographic International Housing Affordability report, which has tracked home prices for 20 years, listed America’s most expensive housing markets as being in California, with Honolulu, Hawaii also among the most expensive in the world.
Down Payment Challenges
The high cost of homes means buyers need substantial down payments. A median-income household would need to save more than $127,000 for a down payment to afford a typical US home, according to Zillow. “Saving enough is a tall task without outside help — a gift from family or perhaps a stock windfall. To make the finances work, some folks are making a big move across the country, co-buying, or buying a home with an extra room to rent out,” said Skylar Olsen, chief economist at Zillow.
Conclusion
The recent decline in mortgage rates offers some respite for potential homebuyers, but significant challenges remain. High home prices, large required down payments, and ongoing issues in homebuilding contribute to the persistent affordability crisis in the US housing market. As the Federal Reserve’s policies evolve and the market adjusts, stakeholders will continue to monitor these critical factors.