Mortgage rates just took the biggest plunge since 1981 — but analysts say the market is ‘not out of the woods yet’

Mortgage rates just took the biggest plunge since 1981 — but analysts say the market is ‘not out of the woods yet’

Mortgage rates tumbled by their biggest weekly drop in four decades after new data suggested inflation could be starting to cool.

Consumer prices rose by 7.7% in October — a slower pace than economists predicted — and the average rate on a 30-year fixed home loan dropped back below 7% shortly after last week’s announcement.

“Some buyers may want to wait and see if rates will drop even lower,” says George Ratiu, manager of economic research at Realtor.com.

“However, with inflation still north of 7% and the Fed committed to keep increasing the funds rate over the next few months, the mortgage market is not out of the woods. We may still see rates rebound back above 7% before the end of the year.”

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30-year fixed-rate mortgages

At 6.61%, the average 30-year fixed-rate mortgage right now is a far cry from the previous week’s rate of 7.08%, Freddie Mac reported Thursday.

At this time last year, the 30-year rate was averaging 3.10%.

“Mortgage rates tumbled this week due to incoming data that suggests inflation may have peaked,” says Sam Khater, Freddie Mac’s chief economist.

“While the decline in mortgage rates is welcome news, there is still a long road ahead for the housing market. Inflation remains elevated, the Federal Reserve is likely to keep interest rates high and consumers will continue to feel the impact.”

Mortgage rates previously topped 7% after the Fed increased the key rate by 0.75 percentage points — and more rate hikes are expected, which would further take a toll on mortgage rates.

(Freddie Mac also notes it has changed its weekly mortgage reporting methodology — the housing giant now uses data from mortgage applications instead of surveying lenders, and it will no longer publish updates for 5-year adjustable rate mortgages.)

15-year fixed-rate mortgages

The 15-year fixed-rate mortgage is also down from last week, when it was averaging 6.38%. It’s now at 5.98%.

A year ago, the 15-year fixed home loan was averaging 2.39%.

Despite the drop in rates from last week, many homebuyers are still priced out of the housing market, notes Nadia Evangelou, senior economist for the National Association of Realtors.

“At 7%, 1-in-8 renters can afford to buy the median-priced home. In contrast, nearly 1-in-3 renters could afford to buy the median-priced home a year earlier when rates were near 3%,” Evangelou says.

“Thus, about 7.9 million renters can no longer afford to buy the typical home, while at the same time, the share of first-time homebuyers reached a new record low.”

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Homebuilder sentiment is at a decade low

Builder confidence for new single-family homes saw its 11th straight monthly decline in November, according to the National Association of Home Builders (NAHB).

It fell five points to 33, marking its lowest reading since 2012 — with the exception of spring 2020, the early days of the pandemic.

“Higher interest rates have significantly weakened demand for new homes as buyer traffic is becoming increasingly scarce,” says NAHB chairman Jerry Konter.

“With the housing sector in a recession, the Biden administration and new Congress must turn their focus to policies that lower the cost of building and allow the nation’s home builders to expand housing production.”

Weakening demand has forced builders to find ways to entice buyers into the market, such as slashing prices and paying points for mortgage rate buy-downs.

Mortgage applications tick up as rates fall

Mortgage applications jumped 2.7% from last week, according to the Mortgage Bankers Association (MBA).

“Application activity, adjusted to account for the Veterans Day holiday, increased in response to the drop in rates – driven by a 4% rise in home purchase applications. Purchase applications increased for all loan types, and the average purchase loan dipped to its smallest amount since January 2021,” says Joel Kan, vice president and deputy chief economist at the MBA.

However, refinance activity is still low — down another 2% from the previous week and 88% from the same week one year ago.

“There is very little refinance incentive with rates so much higher than last year,” says Kan.

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