Mortgage rates drop, backing off 7%

By Anna Bahney, CNN

Washington, DC (CNN) — US mortgage rates dipped this week, backing off 7% as inflation slows ahead of the Federal Reserve’s rate decision meeting next week.

The 30-year fixed-rate mortgage averaged 6.78% in the week ending July 20, down from 6.96% the week before, according to data from Freddie Mac released Thursday. A year ago, the 30-year fixed-rate was 5.54%.

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.

“As inflation slows, mortgage rates decreased this week,” said Sam Khater, Freddie Mac’s chief economist. “Still, the ongoing shortage of previously owned homes for sale has been a detriment to homebuyers looking to take advantage of declining rates. On the other hand, homebuilders have an edge in today’s market, and incoming data shows that homebuilder sentiment continues to rise.”

Mortgage rates have been over 5% for all but one week during the past year and even went as high as 7.08%, last reached in November. Rates had been cooling off and sat under 6.5% for most of the spring. But in May, rates began to move higher as uncertainty around the debt ceiling standoff grew and interest rates remained elevated as economic data showed inflation was stickier than anticipated.

And while June’s inflation data was generally positive, investors attention is now focused on the upcoming two-day Fed meeting, which concludes on Wednesday.

“Though inflation has slowed, the level remains well above the 2% target and investors expect the Fed to hike interest rates in pursuit of this target,” said Hannah Jones, an economic data analyst at Realtor.com.

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.

“As markets prepare for next week’s FOMC meeting and the probable resulting interest rate hike, strong employment data and cooling inflation suggest that the economy’s progress towards stability is on the right track,” said Jones.

But as a result, Jones said, mortgage rates are likely to remain elevated for the time being.

Buyers getting little relief

Mortgage rates have hovered in the 6% to 7% range for the past 10 months and buyers are looking for rates to cool off, as economists have forecast, in the second part of this year.

“Though home prices have softened slightly nationally, the still-high cost of borrowing means hopeful home buyers have felt little relief,” said Jones.

Sales of existing homes has been dropping due to a shortage of available homes, with homeowners hunkering down with ultra-low interest rates they bought or refinanced into over the past few years.

“Many home owners feel ‘locked-in’ by their current mortgage rate and are therefore choosing to hold off on listing their home for sale,” said Jones. “As a result, after more than a year of new listings lagging behind the previous year’s pace, the number of homes for sale has tracked lower than last year’s levels for the past four weeks.”

Buyers are facing a tough summer housing market of still-high home prices, elevated mortgage rates and little inventory to choose from.

“The current market dynamics are likely to persist until affordability and inventory gains are made,” said Jones.

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