Real Estate Tips: Mortgage Rates Drop for the First Time in Four Months

Mortgage rates declined across the board this week, with the average fixed rate on a 30-year mortgage falling to 6.46%. This is the lowest the 30-year rate has been since September 2022, and it's nearly a full point lower than the 7.33% peak seen last November. What's more, rates are expected to continue falling as inflation moderates in the coming months.

Here are the current mortgage interest rates, without discount points unless otherwise noted, as of Jan. 19:

• 30-year fixed: 6.46% (down from 6.63% a week ago).

• 20-year fixed: 6.53% (down from 6.68% a week ago).

• 15-year fixed: 5.72% (down from 5.95% a week ago).

• 10-year fixed: 5.88% (down from 6.07% a week ago).

• 5/1 ARM: 5.44% (down from 5.51% a week ago).

• 7/1 ARM: 5.52% (down from 5.61% a week ago).

• 10/1 ARM: 5.92% (down from 5.98% a week ago).

• 30-year jumbo loans: 6.46% (down from 6.63% a week ago).

• 30-year FHA loans: 5.76% with 0.06 point (down from 5.85% a week ago).

• VA purchase loans: 5.91% with 0.05 point (down from 6% a week ago).

Mortgage rates are widely expected to continue declining throughout 2023 as consumer prices moderate. High inflation has guided the Federal Reserve's monetary strategy over the past year, during which policymakers implemented a series of rate hikes and tightened the central bank's balance sheet. This caused mortgage interest rates to surge in 2022, and the Fed's policy decisions this year are expected to adjust as inflation falls and the economy weakens.

This adjustment has already begun to happen. In their December meeting, Fed officials unanimously agreed that they should slow the pace of benchmark rate hikes. Economists surveyed by Reuters say the Fed will raise the federal funds rate by 25 basis points (0.25 percentage point) at each of its first two policy meetings of 2023 before holding rates steady for the remainder of the year. That's in stark contrast to the seven rate hikes implemented last year, four of which were 75 basis points. 

If the central bank does slow its rate hikes at the pace that economists predict, it would put the terminal rate at 4.75%-5% by March. And depending on what the economy looks like at that point, some investors say the Fed may even begin to lower the rate. 

"While the unemployment rate remains low, economic data continues to point to falling inflation," Orphe Divounguy, senior macroeconomist at Zillow, says in a statement. "A few new proof points include retail sales and producer prices falling again in December. Investors suspect a cooling economy will cause the Federal Reserve to pause, or even reverse, its program of interest rate hikes.”

Indicator of the Week: Home Prices Drop

The median existing home sale price has fallen tens of thousands of dollars over the past six months, from the peak of $413,800 in June 2022 to $366,900 currently, according to the National Association of Realtors. Annual home price appreciation remains positive, as it has been for the past 130 consecutive months, registering 2.3% growth over the past year. 

Although this is the slowest rate of yearly appreciation since May 2020, it's the highest home price recorded for the month of December. Lawrence Yun, NAR's chief economist, says that home prices are seasonally low during the final month of the year. 

"Probably half of the country is in some sort of price declines, while the other half of the country is in price increases," Yun says, adding that the largest price cuts are taking place in the luxury end of the market. 

As prices continue to moderate in the coming months, it's likely that annual home price changes will turn negative for the first time in nearly 11 years. It's hard to imagine that with 6% mortgage rates, existing-home sales prices will eclipse the levels seen last spring when rates were in the 4%-5% range.

There's good reason to expect further price moderation. Nadia Evangelou, senior economist and director of real estate research at NAR, says that "sellers are more willing to negotiate as homes stay on the market longer." In December, the typical home was on the market for 26 days after being listed for sale, up from 24 days in November and 21 days in October. 

"In the meantime, there are fewer offers per listing," Evangelou continues. "The typical seller receives a couple of offers for their home compared to four offers the previous year when buyers were rushing to benefit from the 3% historic low rates."

For homes that sit on the market for more than 30 days, sellers had to reduce the initial asking price by 12% on average, Evangelou says. And after four months on the market, that price cut grows to 15%. As home prices and mortgage rates fall in sync, monthly payments are becoming much more affordable for prospective homebuyers. 

Let's say you're looking at buying a home worth $400,000 with a 30-year fixed mortgage at a 6% rate. With a 10% down payment, your monthly principal and interest payment would be $2,158 – that's before accounting for property taxes, home insurance and private mortgage insurance. But if you were able to negotiate the sales price down by 12%, your new monthly P&I payment would be $1,899. 

However, Evangelou says, homebuyers are still dealing with low inventory respective to home prices. Even six-figure earners would struggle to find a home they can afford in the current housing market. 

"Buyers earning $100,000 can currently afford to buy a home with a price of up to $380,000," Evangelou says. "But only 40% of the listings are in their price range."

One thing to consider, though: If mortgage rates continue to fall further, affordability will improve among all groups of homebuyers. But if lower rates bring more buyers to the market, it could spur competition, which could keep home prices relatively elevated. And as always, homebuying conditions will vary from one regional market to the next.

Source: US News