Mortgage rates dropped for the fourth week in a row, hitting their lowest levels in nearly a year. This reduction follows on the heels of the Federal Reserve’s decision, made just days ago, to lower rates by a quarter-point. Per Freddie Mac’s Primary Mortgage Market Survey, the average rate for a 30-year fixed mortgage as of the week ending September 18 was 6.26%. That’s down from 6.35% a week ago.
Now, mortgage rates are beginning to fall with the recent trends of the 10-year Treasury yield. This increase is representative of investor inflation and growth expectations moving forward. When rates drop, borrowers are given a chance to refinance, resulting in a large spike in applications. Refinance application volume skyrocketed almost 60% last week versus the week before.
Higher mortgage rates typically decrease refinancing and home purchases. The effects of a potential weakening economic outlook would work to counteract this, depressing future housing demand. Orphe Divounguy, a senior economist with Zillow’s Economic Research team, pointed out that in times of economic uncertainty, “residential mobility stalls; buyers, sellers and renters stay put.”
With rising interest rates, adjustable-rate mortgages (ARMs) are making a comeback and gaining the favor of borrowers. Surprisingly, the share of people opting for these loans has reached its greatest share since 2008. With their lower initial rate ARMs can be a tempting product. They are risky, since their rates fluctuate with the market after the initial period, typically five, seven or ten years. All buyers are betting on the hope of more drops in rates as they search through this rocky economic environment.
“Mortgage rates are forward-looking, and by the time the Fed announces a cut, markets have usually already priced it in,” – Bill Banfield, Rocket Mortgage’s chief business officer.
Even as mortgage rates have dropped, borrowers need to keep in mind that they won’t stay down and future increases are possible. If rates go up again, borrowers will be hit with higher monthly payments on average, complicating their financial planning for the years to come.