Market analysts are predicting that some relief for homebuyers may be around the corner, in the form of lower mortgage rates.
In a report released on July 18, Freddie Mac, a government-sponsored buyer of home loans, struck an optimistic tone, stating that “mortgage rates are headed in the right direction and the economy remains resilient, two positive incremental signs for the housing market.”
The rate for 30-year fixed-rate mortgages fell to 6.77 percent, dropping 12 basis points from the prior week and the lowest level since mid-March. This is down from nearly 7.8 percent last fall, but still significantly above rates that were around 2.7 percent in July 2021, before inflation began to escalate.
Economist and former Federal Reserve vice president Gerald Dwyer says both the market component and the risk component of mortgage rates are currently elevated, and both are likely to come down in the short term.
“There are two parts that are elevated,” Mr. Dwyer said. “One part is that long-term Treasurys are up, and they’re going to come down.
“The other part is prepayment risk on mortgages, and that’s going to come down, partly because rates will fall and so the risk of prepaying new mortgages will decline.”
Mortgage rates are based on the 10-year U.S. Treasury bond, the underlying so-called risk-free rate of return that investors demand at any given time. Treasury bonds are considered risk-free because they are seen as having the lowest default risk, given America’s history of always paying its debts.
Loans also include a risk component, which is the chance the borrower will default, or in the case of mortgages, refinance and pre-pay when rates are lower, forcing lenders to reinvest at a lower rate.
All of these factors appear to be moving in a good direction for home buyers.
