Mortgage rates finally sink back below 5% — and home prices are cooling off too amid a market 'reset'

·4 min read

U.S. mortgage rates are tumbling even after the Federal Reserve hiked its benchmark interest rate by 75 basis points last week.

In fact, the average rate on a 30-year fixed mortgage has dipped below 5% for the first time since early April, a new report shows.

Mortgage rates finally sink back below 5% — and home prices are cooling off too amid a market 'reset'
Mortgage rates finally sink back below 5% — and home prices are cooling off too amid a market 'reset'

This is still significantly higher than last year — and the combination of high prices and interest rates is “driving a reset in fundamentals,” says George Ratiu, senior economist with Realtor.com.

“With borrowing costs setting an affordability ceiling for many buyers, home sales are dropping,” says Ratiu.

“In addition, as many homeowners rushed into summer ready to list their property and capture the equity brought about by record-high prices, inventory has improved. This brought a welcome sign in this year’s real estate markets — price cuts.”

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30-year fixed-rate mortgages

The average rate on a 30-year fixed home loan is 4.99%, a significant drop from 5.3% last week, mortgage finance giant Freddie Mac reported Thursday. This time last year, the 30-year rate was averaging 2.77%.

This marks the second week mortgage rates have fallen in a row, and the biggest one-week drop since early July.

And while America’s central bank tightens interest rates to combat inflation — which rose by a four-decade high of 9.1% in June — many economists are warning of an upcoming recession.

“Mortgage rates remained volatile due to the tug of war between inflationary pressures and a clear slowdown in economic growth,” says Sam Khater, Freddie Mac’s chief economist.

“The high uncertainty surrounding inflation and other factors will likely cause rates to remain variable, especially as the Federal Reserve attempts to navigate the current economic environment.”

15-year fixed-rate mortgages

The 15-year fixed-rate mortgage has also lowered, averaging 4.26%, Freddie Mac says. Last week, it averaged 4.58%.

That said, the 15-year rate is still more than double where it was last year at this time when it averaged 2.10%.

The drop in rates has encouraged both refinance and purchase applications, although activity is still low, with homes taking longer to sell than they did this time a year ago.

New listings are also down by 8% compared to this time last year — the fourth straight week of year-over-year declines — meaning sellers could be growing wary of participating in a rebalancing market, according to Realtor.com.

“Some homeowners may feel that they missed the market’s peak and are holding back on listing,” says Ratiu.

“As the number of new listings softens, it raises the concern that the nascent improvement in inventory may prove elusive as we approach the latter stages of summer.”

5-year adjustable-rate mortgages

The five-year adjustable-rate mortgage, or ARM, fell from 4.29% to 4.25% this week. Last year at this time, the average rate was 2.40%.

Rates on adjustable mortgages fluctuate based on the prime rate. ARMs start off with lower interest costs, but they can surge once the initial fixed-rate period ends.

This type of home loan can make sense for buyers who aren’t planning on owning their home for long, or plan to refinance into a longer-term mortgage with a better rate once the initial term expires.

Mortgage applications have gone up by 1.2% since last week, according to the latest report from the Mortgage Bankers Association.

How quickly will home prices cool?

While home prices are still significantly higher than they were a year ago, annual home price growth sank by nearly two percentage points in June, according to Black Knight.

Some metro area markets, like San Francisco and San Jose, are pulling back to pre-pandemic inventory levels, and prices in Seattle and San Diego are softening.

“The pullback in home price growth in June marked the strongest single month of slowing on record dating back to at least the early 1970s – and it wasn’t even close,” says Black Knight data and analytics president Ben Graboske.

“Still, while this was the sharpest cooling on record nationally, we'd need six more months of this kind of deceleration for price growth to return to long-run averages,” Graboske adds.

“Given it takes about five months for interest rate impacts to be fully reflected in traditional home price indexes, we're likely not yet seeing the full effect of recent rate spikes, with the potential for even stronger slowing in coming months.”

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