Mortgage rates dip below 7%, but meaningful declines are still months away

The average weekly rate on the 30-year fixed mortgage dipped slightly to 6.95% from 6.99% a week prior, according to Freddie Mac on Thursday. A separate measure tracking daily averages saw rates fluctuate between 6.97% and 7.17% over the last seven days, according to Mortgage News Daily.

The minor drop in mortgage rates this week is likely not enough for many budget-conscious homebuyers. And any substantial decline is probably at least a year away as the Fed signaled it will cut benchmark rates only one time this year.

One recent study found that a majority of homebuyers, especially first-timers, need a much lower rate before returning to the market.

"For inventory-constrained buyers, mortgage rate trends aren't likely to bust the mortgage rate lock-in effect until at least the end of the year, and possibly well into 2025," said Ralph McLaughlin, Realtor.com senior economist. "Anyone hoping the lock-in effect will be busted this year may be sorely disappointed."

Read more: Mortgage rates today, June 13, 2024: Don't expect drastic decreases until 2025

The latest inflation data has shown signs of moderation. The "core" basis of the Consumer Price Index (CPI), which excludes food and energy costs, climbed 0.2% monthly in May, the lowest since last June. Overall inflation decelerated year over year compared to April.

Mortgage rates dipped on Wednesday morning on the news of improving inflation but rose after the Federal Reserve's announcement. Officials held benchmark rates steady at 5.25% to 5.50%. The Fed now predicts one cut for the rest of the year, two fewer than previous expectations.

Only 1 in 4 Americans expect mortgage rates to decrease over the next 12 months, according to Fannie Mae's homebuyer sentiment survey in May. By contrast, more than 30% of respondents expected rates would increase. The challenging market pushed consumer confidence to a new survey low in May.

"While many respondents expressed optimism at the beginning of the year that mortgage rates would decline, that simply hasn't happened," Doug Duncan, chief economist at Fannie Mae, said in a press release. "And current sentiment reflects pent-up frustration with the overall lack of purchase affordability."

Homebuyers generally hope for a downward rate trend, not just a magic number, before returning to the market, said Matt Vernon, head of consumer lending at Bank of America.

But there may be a light at the end of the tunnel for homebuyers. Bank of America Global Research economists expect multiple rate cuts over the next 24 months: four in 2025 and two in 2026, all in increments of 25 basis points, putting the 2026 final rates at 3.50% to 3.75%. The investment bank predicted four cuts in 2024 at the end of last year.

Read more: What the Fed rate decision means for mortgage rates

Lancaster, California, USA
An aerial view of Lancaster, Calif. (Stewart Sutton via Getty Images)

Financing demand surged 16% last week, according to the Mortgage Bankers Association. The rise in mortgage application volume was mostly driven by a short-lived rate drop during the week when daily rates softened near 7%.

New mortgage applications increased 9% but remained 12% lower than the same week last year. Refinancing activity increased 28% weekly.

“Lower rates earlier in the week meant a strong increase in refinance activity, particularly for VA borrowers, who jumped on the chance to lower their rates.”

At the current average rate, a homebuyer would pay about $1,600 monthly on a $300,000 home with a 20% down payment, according to the Yahoo Finance mortgage calculator.

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Rebecca Chen is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).

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