Mortgage Rates Fall, Homebuyers Face Ongoing Challenges

LOS ANGELES — Mortgage rates have dropped to an average of 6.3% for a 30-year fixed-rate loan, down from above 7% earlier this year, according to Freddie Mac. However, potential homebuyers should not expect a return to the pandemic-era lows of 2021 when rates fell below 3%.

The Federal Reserve began reducing interest rates in September, with further cuts anticipated in the coming months. Despite these changes, analysts warn that mortgage rates are unlikely to decline significantly and will remain near their current levels.

“We don’t expect any big changes,” said Nadia Evangelou, senior economist at the National Association of Realtors. “It’s an adjustment phase,” highlighting the challenges of affordability due to the combination of rates, home prices, and supply issues.

Unlike short-term interest rates, mortgage rates are more closely aligned with long-term bond yields, particularly 10-year Treasury bonds. Investor expectations regarding inflation and economic strength contribute to these yields. Currently, concerns about persistent inflation and a growing fiscal deficit have kept long-term bond yields elevated.

Formerly around 4.7% in January, the 10-year Treasury yield decreased to 4.1% by early October, leading to a corresponding drop in mortgage rates. Governor of the Federal Reserve Jerome Powell noted that while the Fed influences mortgage rates through policy changes, they do not set them directly.

“We think new mortgage rates will still be about 6.000% at the end of 2026,” said Samuel Tombs, chief economist at Pantheon Macroeconomics. “Even if the Fed eases to 2.875% by then,” he added, referring to projected future cuts.

Real estate experts expect that decreased mortgage rates could spur more buyers into the housing market, increasing competition among buyers. Mark Worthington, a loan officer, pointed out that lower rates could allow buyers to secure larger loans while staying within budget.

Despite more potential buyers entering the market, concerns remain that this could drive home prices up due to heightened competition for limited inventory. “If we get a bunch of buyers into the market, that pressure tends to cause competition,” Worthington stated.

For buyers contemplating a home purchase, experts recommend acting now, as the fall season traditionally leads to a slowdown in market activity. Some sellers might be more inclined to negotiate prices. “Buy now if you can afford the home,” advised Christy Bunce, president of New American Funding. “If rates fall significantly, you can refinance later.”

The outlook for mortgage rates remains complex, influenced by the broader economic landscape and Fed policy changes. Analysts suggest buyers consider both the current rates and potential shifts in the market in 2024 and beyond.