Mortgage rates inch down, continuing a ‘sideways trend’ 

Mortgage rates continue to keep consumers — and the industry — on their toes, dipping again slightly for a second week in a row.

The Freddie Mac weekly mortgage rate survey put the current average rate for a 30-year fixed-rate mortgage at 6.35%, down a hair from last week's average of 6.39%. Current mortgage rates are beginning to inch closer to levels from a year ago when rates were about point lower.

Sam Khater, Freddie Mac's chief economist, called it a "sideways trend" as rates seesaw but remain in the 6% range. And he's optimistic about where rates are headed this year. "While inflation remains elevated, its rate of growth has moderated and is expected to decelerate over the remainder of 2023. This should bode well for the trajectory of mortgage rates over the long-term," Khater said.

Applications are up, but activity remains 'subdued'

Mortgage applications increased over the week ending May 5, likely due to the decline in mortgage rates that week. Purchase applications were up 5% for the week, according to the Mortgage Bankers Association weekly survey, while refinance applications increased by 10%. 

Despite the increase in applications, the housing market isn't seeing typical spring activity levels. "A dip in mortgage rates is not enough to quell the growing uncertainty among prospective homebuyers," said Lisa Sturtevant, chief economist for Bright MLS, adding that "the spring market has been subdued" due to elevated rates as well as general economic uncertainty.

And of course, a lack of inventory continues to have an outsized effect on the market. Sturtevant believes mortgage rates will need to dip below 6% before sellers will be convinced to give up their existing low rates. 

Still, MBA VP and Deputy Chief Economist Joel Kan said the increase in applications was a positive response to lower rates, which followed Fed signals that they may hold off on further rate hikes. But inventory, again, is the sticking point. "Lower rates from week to week have helped buyers in the market, but limited for-sale inventory remains a challenge for many homebuyers," Kan said. 

Inflation, the Fed, and the need for patience

While mortgage rates aren't directly tied to inflation levels and Fed actions, the state of the economy has a strong influence. It's notable that mortgage rates fell in spite of the Fed's 25 basis point hike to the Federal Funds rate on May 3, but until the economy stabilizes, rates will likely continue their up-and-down fluctuations.

Inflation has remained stubborn, hardly improving in April. Housing (or "shelter," as it's categorized in the consumer price index), "plays an outsized role in the CPI," noted Sturtevant, but is slower to improve relative to inflation overall. 

Nadia Evangelou, senior economist & director of real estate research at NAR, also pointed to housing — particularly rent — as a key contributor to elevated inflation, but she believes growth has peaked, which "will slow down even further, pulling down mortgage rates. This could bring some sighs of relief to many buyers. With a 6% mortgage rate, more Americans can afford to purchase the median-priced home by putting down less than 20%," Evangelou said.

Sturtevant advises patience. "Instead of continuing to hike interest rates and risk sending the economy into a recession, perhaps a better course of action is to allow time for consumers and businesses to fully react to the new, higher interest rate environment and growing economic uncertainty," she said. 

"The spring housing market has been slower as higher interest rates have eroded buyers' purchasing power and both buyers and sellers are watching an economy that is growing more uncertain," said Sturtevant. "The Fed's rate hikes may, indeed, be having the intended impact but we might just need to pause, take a breath and let the effects move through the economy."