Mortgage rates fall amid AI concerns — despite rising inflation 

This week's volatile mortgage rate environment continued Thursday as 30-year rates experienced a big drop — one that could signal a correction may be taking place.

Investors sold off stock shares in the artificial intelligence sector and moved money into Treasury bonds in the Oct. 15 morning session. The end result: A big drop in the 30-year fixed-rate mortgage, which Mortgage News Daily (MND) pegged it at 7.33% — down from 7.56% the day before, shortly after the latest monthly inflation report was released.

In an online post, MND COO Matthew Graham characterized the shift as a trial balloon for a bigger mortgage rate correction. This, however, is not a guarantee. "It's what the beginning of such a correction would look like," Graham wrote, "but things could reverse surprisingly quickly if the market finds a reason to calm down on AI fears."

Weekly rates hold steady

While mortgage rates have bounced around often in recent days, the latest weekly survey was steady. Freddie Mac, which uses a different set of metrics from MND in gauging rates, estimated that the weekly 30-year rate was 7.4% as of Oct. 15, unchanged from the week before.

Other economic pressures — including sticky inflation and the anticipation of additional Federal Reserve rate hikes — will likely keep rates elevated, according to Realtor.com economist Jiayi Xu. "Bringing inflation under control would pave the way for lower rates and a much-needed boost to affordability for the year ahead," Xu said.

Meanwhile, Fannie Mae said in its October forecast that it is expecting 30-year rates to hold around 7.5% throughout 2027. That's quite a change from Freddie Mac's February forecast, which forecast a 6% rate next year. The government-sponsored enterprise is also now forecasting a 2.9% decrease in housing starts in 2027 following an already sluggish 2026, and expects a slight increase in existing home sales for the same period.

Financing slowdown continues

Mortgage applications have continued to decline, remaining well below last year's pace. For the week ending Oct. 9, the Mortgage Bankers Association's (MBA) purchase application index fell 16% year-over-year, while refinance applications fell 56% for the same period.

The one area where activity is trending up is adjustable rate mortgages, according to Joel Kan, MBA's VP and deputy chief economist. The ARM share recently hit 10.5% — the highest level in a year.

Sellers hanging tough for now

Homesellers appear to be getting the message about the housing market's sluggish conditions. According to the latest Redfin data, the median price for a home for sale was up just 0.5% year-over-year. On a national level, sellers haven't been pulling back just yet. While new listings have fallen 1.3% year-over-year, active listings are 2% higher for the same period even as homes sit on the market longer, Redfin data indicates.

Meanwhile, price reductions are on the rise. In his weekly update, Compass Chief Economist Mike Simonsen estimated that 42.9% of active listings have had a price cut, the highest level for this time of year in a decade. The average price cut is currently 4.2%, or about $18,000 of the national median list price, which sits at roughly $435,000.

"That (average price cut) is growing and bigger than last year, but smaller than 2022 and 2023," Simonsen said.

More demand for rentals

While many would-be buyers are finding themselves priced out of homes, demand and rent prices are on the rise, according to Zillow. The portal's renter demand index climbed 19.2% year-over-year, even as typical rent increased only 2.7% for the same period.

With homeownership remaining a persistent challenge, the number of deliberate renters has increased, according to Zillow Senior Economist Kara Ng, who said higher rates "have pushed home shoppers straight into the arms of rentals."

The "deliberate renter," according to Ng, is someone who chooses to bank the difference between a buyer's monthly payment and rent, and invest the excess elsewhere.