Mortgage rates are at the lowest level in more than a year. For millions of Americans, it will take a lot more than that to make homeownership affordable.
Despite the recent drop, mortgage rates are unlikely to return to anywhere near the levels they were at before the Federal Reserve started to raise interest rates in early 2022. They might not move enough to make a huge difference soon, leaving home buyers to contend with record housing prices, limited inventory and renewed fears of a recession.
“These things take time,” said Peter Federico, chief executive of AGNC Investment, a real-estate investment trust. “Rates need to go down and stay down.”
Signs of a cooling economy have prompted more bets that the Fed will start to cut its benchmark interest rate as soon as next month. That has put downward pressure on the government-bond yields that mortgage rates tend to follow.
The average rate on the standard 30-year fixed mortgage was essentially flat this week, around 6.5%, after logging its sharpest decline of the year last week. That rate is more than a percentage point lower than its peak last year of nearly 8%.
Mortgage bankers have pinned hopes on lower rates to bring home buyers and sellers back to the market after U.S. home sales last year plummeted to the lowest level in decades. Millions of Americans have been priced out of the market, where it has become less affordable than just about ever to buy a home.
Many Americans locked in much lower rates before the Fed started its rate-hike campaign, making them reluctant to move. That dynamic has locked up the market and driven prices even higher.
“Any movement downward will be helpful,” said Selma Hepp, chief economist at CoreLogic.
Rates add up quickly when it comes to mortgages: A difference of a few percentage points can translate to hundreds of thousands of dollars in interest over the life of a 30-year loan.
A borrower who puts 20% down on a $500,000 home, for example, would pay roughly half a million dollars in interest over the life of a standard mortgage at current rates of about 6.5%, according to a Bankrate calculator. With an 8% mortgage rate, they would pay more than $650,000 in interest.
Jordan Schwartz, 30 years old, started law school in 2020 with the hope that he would be able to buy a house in the Chicago suburbs when he graduated. Eight months into his first job as a corporate attorney, he and his expecting wife have abandoned that plan for now and decided to rent. He hopes to still buy one day, but the recent decline in rates hasn’t cut it.
“The math still doesn’t work,” Schwartz said.