Mortgage rates drop for a second week, but remain above 7%

By Anna Bahney, CNN

Washington, DC (CNN) — US mortgage rates ticked down for the second week in a row but remain above 7%.

It’s the fourth consecutive week rates have been above 7% as inflation pressure lingers.

The 30-year fixed-rate mortgage averaged 7.12% in the week ending September 7, down from 7.18% the week before, according to data from Freddie Mac released Thursday. A year ago, the 30-year fixed-rate was 5.89%, the last time the weekly average has been under 6%.

The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit. The data was collected during a holiday-shortened week.

Mortgage rates have spiked during the Federal Reserve’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.

“The economy remains buoyant, which is encouraging for consumers,” said Sam Khater, Freddie Mac’s chief economist.

But it isn’t good news for inflation, which needs to drop further for mortgage rates to come down.

Even though inflation has started to ease, strong economic data has continued to keep mortgage rates elevated this week, Khater said. That is straining potential homebuyers, who have seen their purchasing power dwindle.

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

Inflation is still too high

Rates are not expected to move much in the near term, said Danielle Hale, chief economist for Realtor.com. They didn’t move much during the shortened Labor Day week, and the strong economy, which has been keeping rates over 7%, has been cooling but at a moderate pace.

“In addition to fewer job openings and slower hiring this summer, recent readings on inflation have shown progress,” Hale said a statement.

Still, inflation remains well above the Federal Reserve’s 2% target. The Personal Consumption Expenditures index for July, released last week, showed that prices increased 3.3% annually.

The Fed has been raising interest rates in an effort to cool the economy and bring inflation closer to its target. But as the economy shows signs of resilience, the bond market is concerned that more hikes may be required to tame inflation. The central bank has three remaining policy meetings this year, including later this month.

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.

Although home prices have crept up recently due to historically low inventory, rent prices have trended lower, which Hale says should help move inflation back toward its target in the months ahead.

The economy is nearing an inflection point, she says. But until it shows signs of cooling without protracted job losses or a recession – what’s known as a soft landing – mortgage rate volatility may continue.

Housing market ‘appears to be stuck’

With high mortgage rates, stubbornly high home prices and low inventory, fewer people are buying a home.

Applications for a mortgage to buy a home dropped to a 27-year low this week, according to the Mortgage Bankers Association.

“The housing market appears to be stuck heading into autumn, with sales activity likely to stay stagnant until housing inventory increases and mortgage rates decline to more affordable levels,” said Bob Broeksmit, MBA president and CEO in a statement.

However, August saw an uptick in newly-listed homes, according to data from Realtor.com, “suggesting the possibility that we’ve reached a point where some current homeowners are ready for a change despite the market’s challenges,” Hale said.

Still, the number of homes on the market is historically low, and August’s new listings lag behind prior years for the same period.

“This has kept housing markets surprisingly competitive,” Hale said.

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