The 30-year fixed-rate mortgage averaged 6.49% this week, but is still well below previous highs, leading homeowners to refinance. Mortgage applications surged 17% last week, with a 35% increase in refinance applications as rates plummeted to their lowest level in over a year. With expectations of further interest rate cuts by the Federal Reserve, borrowing costs are likely to decrease even more later this year.
Despite declining mortgage rates, America’s housing market remains unaffordable, especially in urban areas with fast home-price growth like San Diego and New York. High mortgage rates, home prices, and a lack of inventory are challenges the housing market is facing. A shortage of available housing units is contributing to record high home prices, with demand continuing to outpace supply.
Many markets are experiencing a boost in home prices due to a lack of available housing units, leading to affordability issues for many Americans. Total housing inventory has improved every month so far in 2024, but demand still exceeds supply. Factors such as zoning laws, land availability, and population growth trends influence the pace of homebuilding, with some areas seeing a pickup in residential construction to ease housing costs.
Housing costs have played a significant role in the Federal Reserve’s fight against inflation, with shelter costs making up nearly 90% of the consumer price increase last month. Inflation has come down from its 40-year highs in the summer of 2022, reaching a 2.9% annual rate in July. The Fed’s goal is 2% year over year, with shelter costs contributing to inflation.
Lower interest rates are expected to provide relief for Americans facing the housing affordability crisis. The job market has weakened, and inflation is under control, prompting the Fed to consider lowering borrowing costs. The Fed is expected to lower its benchmark lending rate by a quarter-point in September, with the possibility of a larger rate cut. The economy remains strong, with consumer spending fueling economic growth.
The Fed’s actions influence mortgage rates through movements in the benchmark 10-year US Treasury yield. Mortgage rates are expected to drop further this year, but it is uncertain if they will fall below 6%. Rates remain higher than the previous decade leading up to 2022 when the Fed began aggressively hiking interest rates to combat inflation. Fed officials are monitoring the economy and inflation to ensure it stays on track to reach the central bank’s 2% target.
