Fed Signals Rate Cuts, U.S. Mortgage Rates Plunge to 6.55%

The interest rate for the most popular U.S. home loan plunged last week to its lowest level in 15 months after the Federal Reserve signaled it could start cutting its policy rate in September. This, coupled with a slowdown in the job market, fueled financial market bets on significant reductions in borrowing costs. The average contract rate on a 30-year fixed-rate mortgage dropped 27 basis points in the week ended Aug. 2, to 6.55%, the lowest rate since May 2023 and the sharpest drop in two years. This decline provides potential homebuyers with some relief in an increasingly unaffordable housing market, where both home prices and borrowing costs have risen significantly in recent years. July's housing sentiment index from Fannie Mae highlighted this unaffordability, with only 17% of respondents indicating it was a good time to buy a home, down from 19% in June. Additionally, 35% of respondents stated they would rent their next residence, the highest share since 2011. Market Overview:

• U.S. 30-year mortgage rate drops to 6.55%, lowest since May 2023.
• Fed signals potential rate cuts amid cooling job market.
• Refinancing applications rise to a two-year high.

Key Points:

• Only 17% of respondents believe it's a good time to buy a home.
• Refinance share of loan applications reaches 41.7%.
• Fed keeps policy rate in the 5.25%-5.50% range for over a year.

Looking Ahead:

• Potential for further declines in mortgage rates with Fed rate cuts.
• Continued impact of low home inventory on purchase activity.
• Monitoring labor market health as an indicator for Fed decisions.

The drop in mortgage rates also provides an opportunity for homeowners who purchased homes when rates were higher to refinance and reduce their payments. The Mortgage Bankers Association reported that refinancing applications rose sharply to the highest level in two years. However, purchase activity edged up less than 1% due to low inventory of homes for sale, which continues to push prices higher. The Fed's aggressive inflation-fighting rate hikes in 2022 and 2023 had driven borrowing costs to their highest levels in decades. However, the central bank's recent signals suggest that cooling price pressures and a slowing labor market may prompt a policy rate cut as soon as next month. Last week's labor market data, which showed a rise in the unemployment rate to 4.3% and slowed hiring, triggered a rally in U.S. Treasuries, subsequently lowering mortgage rates and offering a silver lining for U.S. households seeking new homes or cheaper housing.