The average interest rate on a 30-year mortgage fell slightly this week, providing some relief to homebuyers facing record-high home prices.
Mortgage buyer Freddie Mac said Thursday that interest rates fell to 6.89% from 6.95% last week. The average was 6.96% a year ago.
The average interest rate has mostly hovered around 7% this year, more than double the rate just three years ago. Rising mortgage rates can cost borrowers hundreds of dollars more each month, deterring many from buying a home this year and bringing the U.S. housing recession into its third year.
Borrowing costs for 15-year fixed-rate mortgages, popular among homeowners looking to refinance, also fell this week, with the average rate dropping to 6.17% from 6.25% last week. The average rate a year ago was 6.30%, according to Freddie Mac.
Mortgage rates are influenced by several factors, including how the bond market reacts to the Federal Reserve's interest rate policy and trends in the 10-year Treasury yield, which lenders use as a guide for pricing mortgages.
Yields have generally retreated since then after rising above 4.7% in late April on expectations that inflation was slowing and that the Fed would cut its key interest rate from its highest level in more than two decades.
“The 10-year Treasury yield fell this week following the June jobs report which showed a cooling in the labor market, and mortgage rates followed suit,” said Sam Carter, chief economist at Freddie Mac.
Yields fell to 4.18% in midday bond trading on Thursday as a new update on inflation raised expectations that the central bank would soon start cutting policy rates.
Fed officials have said inflation has been moving closer to the central bank's 2 percent target in recent months but want to see more data to confirm that trend before cutting rates.
Most economists expect the Fed's first rate cut to come in September, with possibly one more cut before the end of the year.
Longer-term mortgages are unlikely to move significantly from their current levels until the Fed starts to cut short-term rates. Still, if bond yields continue to fall in anticipation of Fed cuts, mortgage rates could ease broadly in the coming weeks.
“Though volatile, the 10-year Treasury rate continues to trend downward, which should result in moderate declines in mortgage rates for the rest of the year,” said Ralph McLaughlin, senior economist at Realtor.com.
Record high home prices and an increasing but still historically limited supply of properties on the market have caused many prospective homebuyers to hesitate this spring during what is traditionally the busiest time of the year for the housing market.
U.S. existing home sales fell for the third consecutive month in May and are expected to continue the downward trend in June.
Many prospective home buyers and homeowners looking to sell are eagerly awaiting lower mortgage rates.
Despite predictions that mortgage rates will ease in the coming months, most economists expect the average rate on a 30-year mortgage to remain above 6% this year.