Mortgage rates are way below their peak. Americans are swooping in

The standard, 30-year fixed-rate mortgage averaged 6.49% this week, up slightly from the prior week’s level, Freddie Mac reported Thursday. But that’s still well below this year’s peak and the two-decade high last fall — and that appears to be enough to entice homeowners to refinance.

Mortgage applications surged 17% last week, driven by homeowners seeking to refinance, up by a staggering 35%, the Mortgage Bankers Association reported Wednesday. Mortgage rates plummeted last week to their lowest level in more than a year, according to figures from mortgage financing giant Freddie Mac.

And borrowing costs are expected to fall even further later this year if the Federal Reserve delivers on the interest rate cuts widely expected by economists and investors.

Despite declining mortgage rates, America’s housing market remains unaffordable for many Americans, especially those with low incomes living in urban population centers with fast home-price growth, such as San Diego and New York. Home prices have reached record highs multiple times this year, according to data from S&P Global and separately from the National Association of Realtors.

“Housing has a lot of challenges ahead of it, not the least of which are high mortgage rates, high home prices and a lack of inventory,” Tom Porcelli, chief US economist at PGIM Fixed Income, told CNN in an interview. “The average payment on a mortgage is still double from four years ago.”

A persistent shortage of available housing units in many markets across the country is continuing to boost home prices. There have been some big steps toward a more affordable market this year, with total housing inventory improving every single month so far in 2024, NAR data show. But demand still exceeds supply.

A key factor that has eased housing costs in places such as Tampa, Denver, and Minneapolis is a pickup in residential construction. The pace of homebuilding depends on factors such as local zoning laws, land availability and population growth trends. In Tampa, an influx of new residents, coupled with many acres of land, have spurred home construction, contributing to shelter-cost growth slowing dramatically. That tugged inflation overall in the metropolitan area much lower, down to 2.4% in the year ended in May, down from more than 11% in 2022.

Persistently elevated housing costs are proving to be an obstacle for the Federal Reserve’s historic, ongoing inflation fight. Inflation is down markedly from the 40-year highs seen in the summer of 2022, reaching a 2.9% annual rate in July, the first time in more than three years that the Consumer Price Index has registered below 3%, according to data released Wednesday. But the Fed’s stated goal is 2%, year over year. Shelter costs made up nearly 90% of the increase in consumer prices seen last month.

Excluding shelter, the CPI was up 1.7% for the 12 months ended in July, the Labor Department said.

Lower borrowing costs ahead

Americans unnerved by the country’s housing affordability crisis can at least count on some relief from lower interest rates soon.

Inflation has come under control just enough and the job market has weakened. It’s also unclear whether unemployment will hold steady or climb even higher from 4.3%, the highest rate since October 2021, in the coming months. That’s enough of an argument for the Fed to begin lowering borrowing costs as soon as next month, according to economists.

But it probably won’t be a huge change. The Fed is expected to lower its benchmark lending rate, which influences borrowing costs across the economy, by a quarter-point in September. Some traders are betting that the Fed might roll out an even larger rate cut of a half-point. But other data suggest the economy remains solid: Separate figures from the Commerce Department released Thursday showed that American shoppers are still fueling the economy with their spending.

Fed officials have said that the economy’s enduring strength has allowed them to sit tight as they gather evidence to make sure that inflation is successfully tamed and is on track to slow to the central bank’s 2% target. Plus, recent comments from central bankers don’t suggest they are planning for any aggressive action next month.

The Fed doesn’t directly set mortgage rates, but its action do influence them through movements in the benchmark 10-year US Treasury yield. Bond yields have typically fallen after weak economic data bolster the chances of the Fed cutting rates, and have climbed at signs of a robust economy encouraging the Fed to keep rates higher for longer.

Mortgage rates are expected to drop even further this year, but it’s unclear whether they’ll fall below 6%. Rates remain higher than anything seen in the decade leading up to 2022, the year when the Fed began to hike interest rates aggressively to battle inflation.