Falling mortgage rates spark late-season demand
Rates have dropped for a third consecutive week, and buyers appear to be responding. But where rates go next is uncertain, and short-term volatility is likely.
Key points:
- The 30-year fixed-rate mortgage averaged 6.6%, its lowest level since late October.
- That coincides with an uptick in homebuying demand, according to Redfin, as well as an increase in mortgage applications.
- Wild cards remain, however, as the Fed considers a rate cut, inflation rises and a new administration prepares to take over.
A steady decline in mortgage rates, coupled with fresh inventory, is creating a rise in buyer demand not typically seen during this time of year.
The 30-year fixed-rate mortgage averaged 6.6% this week, according to the latest Freddie Mac survey. It's the third straight week of declines, pushing the 30-year rate to its lowest level since late October.
How inflation, the Fed and a new administration could impact rates
The market appears to be pricing in a December interest rate cut, with most analysts predicting that the Federal Reserve will cut rates by 25 points when it meets next week.
That's in spite of the much-anticipated Consumer Price Index (CPI) report, which rose 0.3% in November and 2.7% annually. The inflation numbers met the expectations of most economists, but the Fed would like to see that figure go down as it considers its next move.
Despite the CPI bump, other aspects of the report should convince the Fed that a rate cut is still warranted, including the drop in shelter inflation, which fell 0.2% in November. What happens next year is less certain, however, and "the pace of rate cuts may slow in 2025 due to strong economic data and ongoing inflation concerns," said Sam Williamson, senior economist at First American.
If the Fed does decide to make fewer or smaller cuts, Williamson expects mortgage rates to follow a similar path, keeping 30-year rates in the mid-6% range throughout next year.
In the meantime, "we may see rates continue to be volatile over the coming weeks as we approach the new year and inauguration," said Ralph McLaughlin, senior economist at Realtor.com.
Demand indicators up
With mortgage rates trending downward, homebuying demand continues to rise. Demand is now at its highest level since spring, according to Redfin's weekly market report, which shows an increase in home tours, mortgage applications and pending sales.
Don't mistake that for a buying frenzy, however — the market is simply returning to more typical levels following a very slow summer and fall.
"Demand is settling into its new, post-election normal," said Chen Zhao, Refin's economic research lead. "In the months leading up to the election, house hunters were hibernating; demand was slower than we would have expected, even with high mortgage rates. Now, early-stage demand has jumped up to where we'd expect it to be."
While homes are often pulled from the market around the holidays, active listings are up 11.3% year-over-year, and new listings rose 7.9%, giving buyers more choices compared to this time last year.
Mortgage applications increase
Total mortgage applications were up 5.4% compared to the previous week, according to the Mortgage Bankers Association. Refinance applications were a main driver this week, particularly for VA loans, said Joel Kan, MBA's deputy chief economist.
"Purchase applications remained relatively strong and have shown annual gains in all but one week over the past three months," Kan said. "In addition to lower rates, purchase activity continues to be supported by sustained housing demand and inventory that continues to grow gradually in many markets."