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Mortgage rates just dropped below 5%

Monday, August 15, 2022   /   by Dave Magua

Mortgage rates just dropped below 5%

What’s happening:

The biggest story of 2022’s housing market has been rapidly rising mortgage rates.

After all, mortgage rates haven’t risen so fast in 40 years. The average rate on 30-year fixed rate mortgages was 2.7% last August, and reached 5.7% in June 2022. Higher rates affect the entire housing market, as higher monthly payments mean depressed buyer demand and homeowners who decide not to sell because they don’t want to enter a tough market as buyers.

But in the past six weeks, the mortgage rate rise of 2022 has begun to reverse. In fact, for the first time since April, the average 30-year fixed mortgage is currently under 5%.

In some ways, it’s befuddling. The Federal Reserve continues to raise interest rates, and traditionally, rising interest rates mean rising mortgage rates. So what’s going on? How could mortgage rates possibly be falling? Will it continue?

Fears of a Recession May Be Tamping Down Mortgage Rates

Why might mortgage rates be falling? The answer isn’t pleasant: ongoing fears about the economy sliding into a recession.

U.S. gross domestic product (GDP) has declined for two consecutive quarters. The last time the U.S. had two consecutive quarters of negative GDP growth was the first two quarters of 2020, when COVID-19 became a pandemic. Before that, consecutive quarters of negative GDP growth hadn’t occurred since the Great Recession.

It’s no wonder people are concerned about a recession. And when investors are concerned about a recession, they funnel money into safer investments, such as U.S. Treasury bonds. More demand for U.S. Treasury bonds raise their price, and higher prices on bonds means a lower yield for investors.

It’s all complicated and technical, but basically, lower Treasury yields mean lower mortgage rates. In fact, 10-year Treasury yields more reliably correlate to 30-year fixed rate mortgage averages than basic interest rates.

So long as investors remain concerned about a recession, they will continue to take refuge in the safe harbor of U.S. Treasury bonds. As Treasury yields fall (or at least don’t rise), mortgage rates are unlikely to skyrocket.

Mortgage Rates May Already Be Priced for Interest Rate Increases

If the mortgage rate increase of the first half of 2022 could be described in a word, it would be rapid

And the rapidity of this year’s mortgage rate increases may be part of the reason that mortgage rates are leveling off – even decreasing – right now. Some experts speculate that mortgage rates are already priced for whatever additional rate increase the Federal Reserve implements this year.

Remember that inflation has been higher than anticipated or desired for the past year. Just as high inflation has motivated the Federal Reserve to make cash less available by raising interest rates, persistent inflation caused mortgage lenders to preemptively raise rates, assuming the increased costs that were to come.

In this way, it’s possible that current mortgage rates reflect interest rate spikes that haven’t yet occurred, and that factors such as Treasury yields will weigh more heavily on mortgage rates in the months to come.

Housing Market May Be More Accessible for Buyers

Overall, the housing market – and the economy at large – has spent more than two years in a state of volatility and unpredictability. For buyers, especially, it’s been difficult, with record-high home prices and now surging mortgage rates.

But along with fewer mortgage applications and more price cuts to listed homes, the recent drop in mortgage rates may suggest a calmer, more standard housing market for buyers. In particular, any sustained stabilization in mortgage rates will signal to buyers that they don’t need to buy now or face much higher rates in the future.

Know that at this point, mortgage rates aren’t tied strictly to interest rates, and that buyers may finally be catching a break.