The yield on long-term debt securities – particularly the 10-year US Treasury bond – continued its slow downward trend on Tuesday.
Now, a decline in long-term market interest rates signals that investors expect the Federal Reserve to cut short-term rates soon. And given recent positive data on inflation and consumer spending, that could happen sooner rather than later, such as in September.
All of this will likely have a ripple effect on another key interest rate that matters to many people: 30-year fixed-rate mortgage rates, which have been hovering around 7% recently.
Mortgage rate relief will be critical to the recovery of the housing market and to the hope that potential first-time home buyers will get a chance in this economic climate.
It’s not 100 percent certain—nothing is in this economy—but it’s very likely that mortgage rates will fall along with long-term Treasury yields.
“Once 10-year Treasury yields reach 4% or less, we can expect mortgage rates to be around 6% in the not too distant future,” said Guy Cecala of Inside Mortgage Finance.
Even a modest drop in mortgage rates would encourage some first-time buyers and those switching to home ownership to get back into the market, says Eric Freedman of US Bank. They were unable to afford home prices last year due to a rise in mortgage rates to nearly 8 percent.
“When you see the first number drop to 6, it has a psychological effect on potential buyers,” he said.
However, the impact of a slight decline in mortgage rates on the real estate market is limited, says Curt Long, chief economist at the American Credit Unions. He pointed out that a few years ago, interest rates were less than half what they are today.
“Every percentage point counts. But I don’t think there are potential buyers waiting for prices to drop to the levels we saw before COVID, but I don’t know if that’s possible in the foreseeable future,” he said.
And interest rates would have to fall significantly before current homeowners – who are locked into their low pre-2022 mortgages – want to move, says Greg McBride, chief financial analyst at Bankrate.com.
“Homeowners who are paying 2.5% or 3.5% mortgage rates are not keen to put their home on the market now because then they have to go out and finance the next home,” he said.
When mortgage rates fall, there’s no guarantee that home prices will rise, but at least price increases have slowed in recent months, says Chen Zhao, head of the economics team at Redfin.
“At some point, people simply won’t be able to afford these homes anymore and property prices can’t continue to rise,” she said.
Anyone who advocates for more homeowners in this economic climate must hope that they are right.
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