US mortgage rates drop after five weeks of climbing, but stay over 7%

By Anna Bahney, CNN

Washington, DC (CNN) — US mortgage rates ticked down this week, ending a five-week stretch of increases, but remained above 7% amid lingering inflation.

The 30-year fixed-rate mortgage averaged 7.18% in the week ending August 31, down from 7.23% the week before, according to data from Freddie Mac released Thursday. A year ago, the 30-year fixed-rate was 5.66%.

“Recent volatility makes it difficult to forecast where rates will go next, but we should have a better gauge in September as the Federal Reserve determines their next steps regarding interest rate hikes,” said Sam Khater, Freddie Mac’s chief economist.

Mortgage rates have spiked during the Fed’s historic inflation-curbing campaign, sending home affordability to its lowest level in nearly four decades. Buying a home is more expensive because of the added cost of financing the mortgage and rising home prices.

Home prices have been climbing because there are a historically low number of homes on the market to buy. Homeowners who previously locked in lower rates are reluctant to sell now that rates have surged.

The combination of low inventory and high costs has squeezed would-be homebuyers and sent home sales lower than last year.

Economy remains strong, keeping rates higher

Inflation remains well above the Fed’s 2% target, which has kept interest rates elevated. The bond market is concerned that taming inflation may require more rate hikes by the Federal Reserve. The central bank has three remaining meetings this year.

Fed Chair Jerome Powell has emphasized the significance of July’s core Personal Consumption Expenditures, PCE, price index for the Fed’s future path.

But the highly anticipated PCE index, released Thursday, indicated that year-over-year inflation remained high in July at 3.3%. While inflation is high, the moderate 0.2% monthly gain is more consistent with where the Fed would like to see inflation.

Still, this means borrowers can expect to see costs stay elevated in the near term.

While the Fed does not set the interest rates that borrowers pay on mortgages directly, its actions influence them. Mortgage rates tend to track the yield on 10-year US Treasuries, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does and investors’ reactions. When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.

Other signs indicate that the economy may be slowing.

“US job openings dropped in July, providing new evidence that the labor market is cooling,” said Jiayi Xu, economist at Realtor.com, citing the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey report released on Tuesday.

Worst home affordability in nearly 40 years

The summer selling season typically winds down in August. But it’s quieter than usual this year because affordability is so low.

“The challenging combination of a 20-year high mortgage rate and constrained housing inventory is creating an unfavorable environment for today’s homebuyers,” said Xu.

But as rates started moving down slightly, some buyers came out. Applications for mortgages rose from their 28-year lows, according to the Mortgage Bankers Association.

“The last full week of August ended on a positive note, with mortgage applications for home purchases and refinances increasing for the first time in five weeks,” said Bob Broeksmit, MBA president and CEO. “MBA expects rates to move lower in the months ahead, which should help improve affordability slightly.”

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