Mortgage rates tick down ahead of Fed meeting next week

By Anna Bahney, CNN

Mortgage rates fell slightly this week, staying almost flat ahead of the Federal Reserve’s closely watched interest rate-setting meeting next week.

The 30-year fixed-rate mortgage averaged 6.13% in the week ending January 26, down from 6.15% the week before, according to data from Freddie Mac released Thursday. A year ago, the 30-year fixed rate was 3.55%.

“Mortgage rates continue to tick down and, as a result, home purchase demand is thawing from the monthslong freeze that gripped the housing market,” said Sam Khater, Freddie Mac’s chief economist. “Potential homebuyers remain sensitive to changes in mortgage rates, but ample demand remains, fueled by first-time homebuyers.”

After climbing for most of 2022, spurred by the Fed’s harsh interest rate hikes to tame soaring inflation, mortgage rates have been trending downward since November, alongside data that continues to show inflation may have reached its peak. Last week’s mortgage rates hit the lowest level since September.

The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit. Many buyers who put down less money upfront or have less than ideal credit will pay more than the average rate.

All eyes on the Fed

The Fed is expected to continue its rate-hiking campaign at its two-day meeting on January 31 to February 1. The central bank is likely to announce a smaller increase in the fed funds rate, with a quarter-point hike, compared with the half-point and three-quarter-point increases in the meetings last year.

The Fed does not set the interest rates borrowers pay on mortgages directly. But its actions influence them. Mortgage rates tend to track the yield on 10-year US Treasury bonds, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does and investors’ reactions.

When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.

“The Freddie Mac fixed rate for a 30-year loan rebounded slightly this week, following the trajectory of the 10-year Treasury,” said Jiayi Xu, an economist at Realtor.com. “While businesses and investors are watching the market closely, the recent large-scale layoffs in the tech sector combined with Monday’s stock market rebound have created mixed signals.”

On one hand, she said, many cash-burning tech companies are struggling with the Fed’s rate hikes. On the other hand, investors are happy about slowing inflation and anticipate that interest rate hikes may begin to moderate or stabilize in the months ahead.

Economic indicators like the low unemployment rate and the cooling inflation rate do not point toward a recession, Xu said. “However, it’s important to keep in mind that monetary policy takes time to have an impact, and these economic indicators might not yet show the full effects of the restrictive policy,” she said.

While the Fed may continue to raise rates this year, Xu said, the slower pace will help to create a soft landing for the economy by balancing the risks of bringing down inflation without pushing up the unemployment rate.

“Despite slowing inflation, the expected ongoing restrictive monetary policy may keep mortgage rates in the 6%-7% range in the short term,” she said.

Mortgage applications rise

The downward trend for mortgage rates since November has had a positive impact on home affordability for mortgage borrowers.

Homebuyer affordability improved in December, with the national median payment decreasing 2.9% to $1,920 from $1,977 in November, according to the Mortgage Bankers Association.

Many buyers are taking advantage of the relatively lower rates of the past few weeks: Applications for mortgages were up 7% last week from one week earlier, according to MBA.

“Borrower demand, thanks to lower mortgage rates, continues to rise in early 2023,” said Bob Broeksmit, MBA president and CEO. “Mortgage applications increased for the third straight week. Purchase demand is still below year-ago levels, but lower rates and improving affordability are favorable developments for the housing market heading into the spring.”

Buyer traffic is picking up in many markets, even if inventory is slow to improve.

“High costs and concerns about economic uncertainty had many buyers pausing their purchasing decisions and led to fewer transactions,” said Xu. “However, decreased competition may have presented opportunities for some first-time home buyers.”

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