If you're on the hunt for the perfect house or condo, the future of mortgage rates might be a concern. The Federal Reserve, led by Chairman Jerome Powell, could be a determining factor as it is anticipated to possibly cut interest rates in September.
Why It Matters
Mortgage rates often follow the 10-year Treasury yield, which has been trending downwards. As of Friday, the yield closed at 4.402%, slightly up from 4.201% the previous day but down 6.3% from its peak in April and 12.4% from October 2023, when the yield was around 5%. At that time, mortgage rates were nearly 8%, compared to closer to 7% now.
Understanding the Numbers
Rates on 30-year mortgages typically hover about 2.3 to 2.5 percentage points above the 10-year yield. In October, a 30-year mortgage cost around 7.8%, making a noticeable impact on monthly payments. For instance, a drop to 6% could lower monthly payments to $1,799.
The Fed's Battle Against Inflation
The Federal Reserve has been focused on combating inflation, which surged due to the pandemic and geopolitical tensions like the Ukraine-Russia war. This led to significant increases in oil and gasoline prices, with the Consumer Price Index reaching a 9.1% year-over-year change in June 2022. To curb inflation, the Fed raised its key interest rate 11 times between March 2022 and July 2023, stabilizing it at 5.25% to 5.5%.
Impact on the Housing Market
High interest rates have significantly impacted the housing market, reducing housing starts by 30% since early 2022 and existing-home sales by 35% since January 2022. Lowering mortgage rates below 7% could stimulate the market. According to Lew Sichelman from National Mortgage Professional magazine, mortgage lenders anticipate a surge in refinancing if rates drop below 6%.
What's Next?
With recent favorable inflation numbers, there's speculation about a rate cut as early as September. This could benefit home builders, who saw significant stock drops in the second quarter of 2024. The iShares U.S. Home Construction ETF (ITB) fell 21.1%, while PulteGroup (PHM) experienced an 8.7% decline after a strong first quarter.
Political pressure is also mounting, with President Joe Biden and potentially Donald Trump, if he wins in November, advocating for rate cuts. The market is keenly watching the Federal Reserve’s next move.
Stay tuned as the situation develops and prepare for potential changes in mortgage rates that could impact your home-buying decisions.