Rate cuts are looking more likely — but not quite yet 

Mortgage rates, which dipped slightly this week, could continue to fall after the latest data shows inflation easing — something that increases the likelihood of rate cuts.

Even before today's release of the Consumer Price Index — which showed annual inflation dropping from 3.3% in May to 3% in June — mortgage rates were on the decline. This week, the 30-year fixed-rate averaged 6.89%, down from 6.95% the week before, according to Freddie Mac.

The 15-year fixed-rate mortgage also fell, averaging 6.17%.

The dip in rates was likely caused by last week's jobs report showing a cooling labor market, said Sam Khater, Freddie Mac's chief economist.

"We're also seeing more inventory on the market, including a fair number of listings with price cuts, which is an encouraging sign for prospective buyers," Khater said.

The Federal Reserve's next meeting is scheduled for July 30-31, but analysts don't expect the Fed to cut rates until September, said Lisa Sturtevant, chief economist for Bright MLS. But the market could start to shift before then.

"Mortgage rates could begin to come down even before an actual cut to the federal funds rate, however, if members of the central bank continue to clearly telegraph their intentions," Sturtevant said.

What drove down inflation

Some of the biggest drops seen in the CPI report were in gas prices (down 3.8% in June) and used cars (down 1.5%). Shelter, a lagging indicator that focuses on home rent rates, increased 0.2% — but that was down from the 0.6% increase at the beginning of 2024.

The National Association of Home Builders is forecasting that the shelter category will continue to decline in the coming months, which could finally get the inflation rate closer to the Fed's 2% goal.

Lower rates, more inventory, but applications relatively flat

A downward trend in mortgage rates would be welcome news to homebuyers, who would also have more homes to choose from as inventory continues to build, said Ralph McLaughlin, Realtor.com's senior economist. 

Even if rates continue to fall, McLaughlin doesn't expect a flood of buyers to enter the market, but instead predicts home sales will tick up gradually.

Mortgage applications showed little movement, falling 0.2% from the previous week, according to the Mortgage Bankers Association. Purchase activity was up slightly in the past week while refinance activity continued to decline, said Joel Kan, MBA's deputy chief economist. The purchase index remains 13% below last year's levels.

A peak for home prices?

A continued drop in mortgage rates in the coming weeks would also coincide with an expected seasonal drop in home prices. While the latest Redfin report found the U.S. home-sale price hit an all-time high of $397,482 during the four weeks ending July 7, it also noted there are signs that this is the peak. 

The typical home is now selling for 0.4% less than its asking price — and that hasn't happened at the beginning of July since 2020. Redfin's Homebuyer Demand Index is also down 16% compared to a year ago.