Aileen Barrameda intends to purchase a home in Los Angeles in the coming months, undeterred by mortgage rates that, while recently declining, remain stubbornly high – double the rate she encountered at the outset of the coronavirus pandemic.
“If I have the means to enter the market, I might as well do it now, because home prices are only projected to increase,” Barrameda stated.
Housing affordability remains a significant concern for many Americans and a prominent political issue. Former President Donald Trump previously expressed hope that interest rate cuts by the Federal Reserve would alleviate mortgage burdens for prospective homeowners.
According to Freddie Mac, the average rate on a 30-year mortgage, the most prevalent type of home loan in the U.S., decreased to 6.35% last week. This represented the most substantial weekly drop in the past year and the lowest level observed in 11 months.
However, for buyers like Barrameda, there’s no guarantee that borrowing costs will decrease significantly beyond their current levels, despite the Federal Reserve’s recent interest rate cut.
Federal Reserve decisions do not directly dictate mortgage rates. Instead, they influence the rates banks charge each other for borrowing funds.
This, in turn, affects the interest rates banks offer to customers on loans such as mortgages, as well as the interest paid on savings accounts.
Anticipating the Fed’s recent rate cut, U.S. banks had already lowered mortgage rates, suggesting that further substantial declines may not materialize. Prospective homebuyers awaiting more significant easing may face disappointment.
Fed Chair Jerome Powell alluded to this during a press conference on Wednesday.
“Most analysts believe that a substantial shift in rates would be necessary to significantly impact the housing sector,” he stated, while acknowledging that lower interest rates could stimulate demand and aid builders.
Furthermore, the risk of rising inflation could drive mortgage rates upward if banks anticipate that the Fed will refrain from further rate cuts in the near future. Central banks, including the Fed, typically avoid lowering borrowing costs if they perceive inflation as excessively high.
“I believe people are anticipating a major impact from this,” stated Nicole Stewart, a real estate agent with Redfin in Boise, Idaho, referring to the Fed’s rate cut.
“I’ve been advising most of my buyers, as well as my sellers, that we’ve already witnessed the majority of the potential effects.”
Stewart noted that a decrease in mortgage rates over the past month has encouraged some buyers. Earlier this month, she wrote four offers and placed three deals under contract in a single weekend.
“A substantial increase from anything in the past few years,” she remarked.
Nevertheless, the U.S. housing market remains unaffordable for many. This issue is unlikely to be resolved by future Fed decisions or the recent dip in mortgage rates.
Many homeowners secured exceptionally low mortgage rates – in the 3% range – during the height of the coronavirus pandemic, which they are reluctant to relinquish by selling their homes. Consequently, homeowners who might otherwise downsize are opting to remain in place, thereby reducing the supply of available housing and driving up home prices.
According to Julia Fonseca, an associate finance professor at the University of Illinois Urbana-Champaign, approximately 80% of mortgage borrowers have locked in rates below the current average of 6.35%.
While each decline in mortgage rates contributes to a slight loosening of the market, there are no indications of substantial relief on the horizon, Fonseca stated.
“We may still be far from normalizing these markets,” she said.
Kristin Carlson, a prospective first-time buyer in the Boise area, has been monitoring the market for four years while renting in the interim.
For Carlson, the recent easing of mortgage rates means she is “that much closer to making a purchase.” She expressed eagerness to buy soon, hoping to capitalize on current conditions before rates potentially decline further, thereby intensifying competition.
Borrowing costs are influencing Carlson’s considerations regarding the type of home she can realistically afford – the neighborhood, size, and builder quality.
However, mortgage rates are taking a backseat to other factors, including seasonality and finding a home that aligns with her needs.
According to Matt Vernon, head of consumer lending at Bank of America, modestly lower mortgage rates are providing some relief and stimulating activity among buyers. However, he cautions that the dip is unlikely to be sufficient to resolve the underlying issues plaguing the housing market.
“There’s cautious optimism that we’re headed in the right direction,” Vernon said.
“I don’t think it’s necessarily changed buyers’ perception of the challenges in the market, but it’s certainly got their attention.”
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