House with arrow going slightly down with percentage sign
Illustration by Lanette Behiry/Real Estate News

As interest rates decline, loan activity begins to bounce back 

The 30-year fixed-rate mortgage averaged 6.15% this week, the lowest rate since September.

January 19, 2023
3 minutes

Key points:

  • The declining mortgage rate could be behind this week's bump in loan applications.
  • While good news for potential homebuyers, they still don’t have many choices as inventory remains low.

As mortgage interest rates approach 6%, more potential buyers are applying for home loans.

Freddie Mac's latest survey found the 30-year fixed-rate mortgage averaged 6.15% this week, a significant drop compared to the beginning of January, when the rate was at 6.75%. 

"Rates are at their lowest level since September of last year, boosting both homebuyer demand and homebuilder sentiment," said Sam Khater, Freddie Mac's chief economist. "Declining rates are providing a much-needed boost to the housing market, but the supply of homes remains a persistent concern."

This decline is likely contributing to a boost in mortgage applications, which jumped 27.9% in the past week compared to the week before, according to the Mortgage Bankers Association's weekly survey ending Jan. 13. 

Despite the weekly gains, applications remain 35% below last January's levels, when the mortgage rate was around 3.5%.

December reports of easing inflation are a factor in the dropping rates, although there are still some reasons to be concerned, said economist Jiayi Xu.

"Although the slower inflation rate in December is a positive sign, concerns from businesses and investors about economic growth continue to rise as weaker retail sales data remind us that the U.S. consumer is not invincible," Xu said.

While rates have been on the decline in recent weeks, economic and political factors could change that trajectory. If the looming debt limit standoff between the Biden administration and Congress worsens, rates could quickly rise, said Orphe Divounguy, senior macroeconomist at Zillow Home Loans.

"The closer we get to the brink, the higher the risk of default. This could raise borrowing costs, including mortgage rates, thus hampering an already cold housing market," said Divounguy, noting that this happened before in 2011. "A fight over raising the debt ceiling is likely to drag into the summer, and mortgage borrowers should expect rate volatility as a result."

For buyers ready to jump back into the market, they may have trouble finding good options as inventory remains tight, said Bright MLS Chief Economist Lisa Sturtevant.

"New listings do tend to pick up in advance of the spring market, and it's possible we will see inventory expand in the weeks ahead," Sturtevant said. "However, this is an unusual market, and we know many existing homeowners are sitting on extremely low mortgage rates and may not have any incentive to move. As a result, it's likely that inventory will remain relatively low even as the market begins to rebound this spring." 

The 15-year fixed-rate mortgage has also trended downward. According to Freddie Mac it is now averaging 5.28%, down from 5.52% the previous week.

Get the latest real estate news delivered to your inbox.