Mortgage rates at highest point since July despite cuts
“Buyers and sellers are gradually returning” but inventory could take a hit if homeowners stay locked in to their lower rates, experts say.
Key points:
- Freddie Mac’s survey found 30-year fixed-rate mortgages averaged 6.85% this week.
- Long-term rates continue to drift upward even after the Federal Reserve cut short-term interest rates.
- New and existing home sales in November indicate buyers and sellers are settling into the expectation that rates will remain higher for longer.
Turning the page on another year is going to have a different feel for the real estate industry compared to the start of 2024.
A year ago, 30-year fixed-rate mortgages were averaging 6.61%, with an expectation that rate cuts were coming soon. This week Freddie Mac's rate average was 6.85%, with expectations that it will remain elevated for the start of 2025 even after three interest rate cuts this fall.
The question now becomes whether home sellers and buyers adjust to this new normal of elevated rates. There are some signs that it is happening, said Mark Fleming, chief economist at First American.
"Buyers and sellers are gradually returning, supported by a healthy labor market and more homes for sale compared to last year," Fleming said. "The result is steady, single-digit house price growth, reflecting a market returning to normal following the pandemic-to-post-pandemic roller-coaster ride."
However, if homeowners continue to hold onto their locked-in low rates, inventory will tick back down and prices will keep rising in 2025, said Redfin Senior Economist Sheharyar Bokhari in a home price index report. The report noted that home prices grew 0.5% in November and is up 5.7% year-over-year.
What's up with the mortgage rate?
The Freddie Mac survey rate rose to its highest level since July following the 25-basis point rate cut by the Federal Reserve. A forecast of fewer cuts in 2025 boosted rates in the following days, said Hannah Jones, economic research analyst at Realtor.com.
The daily average continues to steadily rise, according to Mortgage News Daily. The site, which uses different metrics than Freddie Mac, put the average 30-year fixed-rate mortgage at 7.16% for Dec. 26. Bonds are currently trending toward "the path of least resistance" where longer term rates are moving at a faster pace than short-term rates, said Matthew Graham, chief operating officer at MND.
"There are days where that momentum seems self-sustaining without any additional motivation. Today is just the latest example," Graham said in a Dec. 26 online post about the markets.
Some positive signs in new and existing home sales
Despite the elevated mortgage rates, there was an uptick in home sales in November. New home sales were up 5.9% to a seasonally adjusted annual rate of 664,000, according to the U.S. Census Bureau.
The National Association of Realtors reported existing home sales rose to a seasonally adjusted annual rate of 4.15 million in November, up 6.1% year-over-year.
While higher-for-longer mortgage rates are providing some headwinds, the new home market is expected to outperform the existing-home market, said Odeta Kushi, chief economist at First American.
"Builders have inventory they need to sell, and the ability to offer incentives to coax buyers off the sidelines," Kushi said, noting that the months' supply inventory for new homes is at 8.9 months, close to the highest level since 2022.