Mortgage rates fall below 7% for the first time in months with experts believing more declines to come
The average rate on the 30-year mortgage drops to 6.95%, the lowest since August
Mortgage rates hit the 6% range for the first time since August, and many housing economists believe that trend could continue.
The average rate on the 30-year mortgage dropped to 6.95% from 7.03% the week before, according to Freddie Mac on Thursday. Rates fell for the seventh consecutive week and hit the lowest level since early August when rates were 6.96%.
Thanks to bullish overall inflation data, housing experts are predicting near-future rate cuts that will bring mortgage rates even closer to 6%, helping the slow and expensive US housing market that has sidelined many homeowners and prospective buyers over the last 12 months.
"Given inflation continues to decelerate and the Federal Reserve Board’s current expectations that they will lower the federal funds target rate next year, we likely will see a gradual thawing of the housing market in the new year," Sam Khater, Freddie Mac’s chief economist said in the press release.
Read more: Mortgage rates falling: Will 2024 be a good time to buy a house?
CPI data suggests future rate cuts
The latest Consumer Price Index (CPI) data showed that inflation has moderated to 3.1% year-over-year in November, a welcoming sign for the housing market as the Federal Reserve closes in on its target 2% inflation rate.
Since financing rates soared last summer, homeowners and sellers have been stuck in a market gridlock where owners are not selling in order to keep their low interest rates, and the majority of buyers can't afford the extra financing cost, resulting in the lowest pending home transaction volume in two decades.
"After picking up somewhat over the summer, activity in the housing sector has flattened out and remains well below the levels of a year ago, largely reflecting higher mortgage rates," Fed Chair Jerome Powell said in Wednesday's FOMC meeting.
But that could soon change as housing experts forecasted rate cuts in 2024. Lawrence Yun, chief economist at the National Association of Realtors (NAR), believes the Fed could start chipping away at rates as early as the spring and could reduce as much as 100 basis points by the end of next year, which would bring average mortgage rates down to about 6.3%.
"The job market is beginning to soften. With each passing month, jobs are being added but are becoming lighter and lighter," Yun said during NAR's 2024 Real Estate Forecast Summit on Tuesday. "The Fed certainly doesn't want to see the number turn negative."
Read more: How to buy a house in 2024
Another expert thinks rates below the 6% range would meaningfully turn the market around, bringing back inventory and thus lowering home prices on top of reducing borrowing costs in 2024.
"I think we'll see a bigger uptick in housing demand if mortgage rates were to fall into the 5s because that will reduce the strength of the lock-in effect for a greater share of homeowners – more than 90 percent of whom have an outstanding mortgage rate that is under 6 percent," Danielle Hale, chief economist at Realtor.com, told Yahoo Finance.
The central bank signaled lower rates to come during Tuesday's FOMC meeting. Powell said while the committee is proceeding carefully, rates are projected to drop to 4.6% by the end of 2024 if the economy evolves as projected. Another recent forecast also suggested that the Fed could cut interest rates by 0.50% in the coming year, thanks to falling inflation and a slowing labor market.
But the Fed is keeping rates steady at 5.25%-5.50% for now, reaffirming its commitment to tame inflation.
Read more: What the Fed rate-hike pause means for mortgage rates and loans
Shelter inflation remains sticky
While overall inflation decelerated, the housing component of the Consumer Price Index remained elevated. Housing prices and rent climbed 0.4% monthly and 6.5% annually in November, according to the Bureau of Labor Statistics.
Shelter inflation comprises around one-third of overall CPI and accounted for nearly 70% of the total increase in all items except food and energy in November, BLS reported. Two major components of shelter inflation — owner's equivalent rent, or OER, and rent — recorded a 6.7% and 6.9% annual increases in November, respectively.
However, Yun refuted that, noting private sector rental data are only showing a 1% to 2% increase in rents, although the government data shows 6.9%. He said there is an oversupply of apartments in various regions, even in high-demand places like Austin, Texas, and Charlotte, N.C., pushing down rent growth.
"If we were to use the private sector apartment data, we would already be under 2% inflation, and it would be time for interest rate cuts," Yun said.
Read more: 5 strategies to get lower mortgage rates in 2024
Rebecca Chen is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).
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