Reasons for Mortgage Rates Hitting a More Than One-Year Low

This week saw a decline in mortgage rates to their lowest point in over a year, finally bringing some sought-after relief to potential homebuyers.

The mean interest rate for a 30-year fixed mortgage is currently at 6.47%, according to Freddie Mac, which announced this on Thursday. This marks a drop of more than a percentage point from the peak reached last year following the Federal Reserve’s increase in interest rates to combat inflation.

Despite the Fed maintaining interest rates at their highest level in two decades, mortgage rates are on the decline. But why is this happening?

Experts interviewed by ABC News attribute this decline to a widely held belief that the Fed will initiate interest rate cuts at its upcoming meeting in September. A weaker-than-expected jobs report last week strengthened these beliefs, causing a decrease in yields for 10-year treasuries, subsequently leading to a drop in mortgage rates.

The yield on a 10-year Treasury bond, or the annual payment to a bondholder, plummeted last week after the Fed hinted at an upcoming interest rate cut and a disappointing jobs report lent credence to these expectations. Mortgage rates follow the movements of 10-year treasuries closely.

“These 10-year treasury rates will directly affect lower mortgage rates, as seen in recent data,” Julia Fonseca, a professor at the Gies College of Business at the University of Illinois at Urbana-Champaign, informed ABC News.

The likelihood of an interest rate cut in September is almost certain, as indicated by the CME FedWatch Tool, a gauge of market sentiment. Market experts are divided on whether the Fed will implement its usual quarter-point cut or opt for a larger half-point cut.

“The jobs report has caused markets to reassess the future trajectory of interest rate cuts,” Lu Liu, a professor at the Wharton School at the University of Pennsylvania, specializing in real estate, shared with ABC News.

“Since mortgage rates are based on current treasury rates, these rates have already factored in expectations for future rate cuts,” Liu added.

Experts hold varying opinions on the future of mortgage rates, as it hinges on future economic performance and the Fed’s response, which can be challenging to predict, they noted.

The economy has been gradually cooling off for months, alongside decreasing inflation. While the U.S. has repeatedly defied previous warnings of an imminent recession, economists are divided on whether current conditions pose such a risk.

Stijn Van Nieuwerburgh, a real estate professor at Columbia University Business School, anticipates a continued economic slowdown. This will trigger interest rate cuts and declining mortgage rates, he added.

“We’ve reached the peak of interest rates,” Nieuwerburgh stated to ABC News. “Mortgage rates are expected to decrease over the next few years.”

However, he acknowledged the challenge of forecasting economic outcomes and the potential for a reversal leading to interest rate hikes. “Never say never,” Nieuwerburgh cautioned.