The 30-year mortgage rate in the United States has finally dropped to its lowest level in 15 months.
According to data released by Freddie Mac, a major mortgage financing company, on the 8th, the average rate for a 30-year standard fixed-rate mortgage in the United States fell by 0.26 percentage points to 6.47%, marking the largest single-week decline in about nine months.
Since the Federal Reserve decided to raise interest rates in 2022 to curb inflation, the mortgage rate for home purchases in the United States has nearly doubled. Higher loan costs have squeezed many potential homebuyers out of the market. According to data from the National Association of Realtors (NAR), home sales in 2023 fell to the lowest level in nearly thirty years, and sales in 2024 were also sluggish, with a year-on-year decrease of 5.4% in existing home sales in June, marking the fourth consecutive month of decline.
Kashif Ansari, co-founder and CEO of Juwai IQI Group, a global real estate technology company headquartered in Kuala Lumpur, told reporters from Yicai that a 7% home purchase interest rate is the "psychological threshold" for buyers with urgent needs, but it is generally believed that a rate drop to 4% to 5% would be considered "normal." The market anticipates that interest rates may not be adjusted to this range until 2025. Most homeowners in the United States currently have mortgage rates below 3%, and the current rates will still deter some buyers from making a move.
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Will mortgage rates decrease further?
In the United States, mortgage rates are not directly linked to the actions of the Federal Reserve but typically follow the changes in the yield of 10-year Treasury notes, although they are not entirely consistent. The rise and fall of the benchmark 10-year Treasury yield depend on economic expectations.
Due to the weaker-than-expected employment report released by the U.S. Department of Labor on August 2, which triggered panic, the 10-year U.S. Treasury yield, which supports borrowing costs, "plunged," falling by 0.12 percentage points to 3.98%, breaking below 4% for the first time since early February. As of the time of the reporter's writing, the 10-year Treasury yield has rebounded compared to the 2nd.
However, analysts believe that even if the 10-year U.S. Treasury yield does not fall further from its current level, there is still a significant room for mortgage rates to continue to decline. From 2010 to 2020, the 30-year mortgage rate was on average 1.69 percentage points higher than the 10-year Treasury yield, far below the current spread level (approximately 2.48 percentage points).
Although not directly linked, the Federal Reserve's interest rate cuts will eventually drive down mortgage rates by affecting bank financing costs, market expectations, and the overall interest rate environment. Greg McBride, Chief Financial Analyst at Bankrate and Chartered Financial Analyst, said: "It is expected that the Federal Reserve will turn to rate cuts as early as September, so mortgage rates will tend to go down. A 25 basis point rate cut in September has already been largely reflected. If the magnitude and timing of the Federal Reserve's rate cuts can be further clarified, it will drive down mortgage rates."
Will lower interest rates attract potential buyers back?Ansari stated that over the past two years, the rise in mortgage interest rates has squeezed many potential homebuyers out of the market. Sellers who intended to list their properties for sale also found it difficult to relinquish the mortgages they had secured before the interest rate hike. As a result, both the supply and demand sides have been suppressed.
Due to persistently tight supply and a "coiled spring" of demand, U.S. housing prices have remained high with no signs of easing. The latest data from the U.S. Census Bureau shows that the median price of existing homes reached a record high of $427,000 in June, a year-on-year increase of 4.1%.
As sales weaken, according to data from the U.S. Department of Housing and Urban Development (HUD), the inventory of new and existing homes in June reached 4.7 months, the highest since June 2016. In other words, it would take 4.7 months to sell all available homes at the current sales pace. In contrast, during the most tense period of the pandemic, the supply of homes for sale in the U.S. real estate market could only sustain two months of sales.
Selma Hepp, Chief Economist at CoreLogic, a global real estate and financial data analysis company, said: "Despite the increasing inventory of homes for sale, sales of existing and newly built homes remain sluggish due to homebuyers' vigilance regarding the direction of mortgage interest rates and real estate market trends, especially in markets affected by soaring housing insurance and tax costs. However, if the Federal Reserve takes rate-cutting action in September, it may help drive down mortgage interest rates and inject some much-needed momentum into potential homebuyers."
Amy Wang, a broker at New York real estate firm Serhant, told Yicai Global: "At present, the announcement of a rate cut by the Federal Reserve would be a significant turning point for the housing market. Once this news arrives, it will greatly boost the market. It is essentially a cash buyer's market now, and most of the transactions I handle are for cash purchases."
However, in the long term, Sam Khater, Chief Economist at Freddie Mac, believes that, setting aside interest rate fluctuations, the larger structural issue in the U.S. housing market is the lack of supply, which will not disappear.
U.S. Census data shows that the housing start rate for single-family homes in the U.S. has declined for the fourth consecutive month in June, with the construction permit applications for single-family homes falling by 2.3%, the slowest in over a year. The number of homes under construction has dropped to the lowest level since early 2022. Concurrently, confidence among residential builders has also declined, with the latest builder sentiment index compiled by the National Association of Home Builders and Wells Fargo currently at its lowest point of the year.
Stephen Stanley, Chief U.S. Economist at financial institution Santander Capital Markets, analyzed: "From most aspects, the housing demand this past spring was disappointing, leading builders to face the issue of excess inventory. Thus, the recent pullback in the start of single-family homes is a natural reaction, and it would not be surprising to see further declines in the start of single-family homes in the future."
Ansari also stated that the shortage of residential supply and the difficulty in building affordable homes are the main causes of the U.S. housing affordability crisis, and neither of these issues has been truly resolved, which will become a long-term problem for the U.S. housing market.
"High interest rates will eventually normalize, but the residential land planning and the American preference for single-family homes are the norm. There is a long-standing tension between the comfort of residential areas and the density of residential areas, leading to excessive restrictions on residential development. The chronic shortage of residential supply means that the wealth of homeowners will continue to grow, while the dream of home ownership for those in urgent need will become increasingly distant," he explained.
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