U.S. mortgage rates extended their recent declines last week, falling to the lowest levels since August, as a big rally in U.S. Treasury bond yields looks set to provide a much-needed boost to home affordability.
The Mortgage Bankers Association said average 30-year fixed rates for conforming loan balances of less than $726,200 fell by 20 basis points (0.2 percentage point) to 7.17% for the week ended Dec. 1.
The move took the average rate to the lowest since late summer. The MBA's average rate hit 7.9% in late October, the highest since 2000.
Related: Mortgage rates need to hit this target before buying a home really makes sense again
The MBA's seasonally adjusted Purchase Index, which tracks mortgage applications for purchases of single-family homes, fell 0.3% from the previous week, after hitting the lowest levels since 1995 last month. It remains some 17% lower compared with the year-earlier period, "held back by low inventory and still-challenging affordability conditions," according to the group's chief economist, Joel Kan.
“Slower inflation and financial markets anticipating the potential end of the Fed’s hiking cycle are both behind the recent decline in rates,” Kan said. “Refinance applications saw the strongest week in two months and increased on a year-over-year basis for the second consecutive week for the first time since late 2021.”
Treasury bonds rally on spring rate-cut bets
The pullback in mortgage rates comes amid one of the biggest rallies in benchmark U.S. Treasury bonds, which form the basis for most home lending, since the global financial crisis. (Bond yields fall as prices rise.)
Traders have been betting heavily on the likelihood that the Federal Reserve, which sets the benchmark lending rate for the U.S. economy, will be lowering borrowing costs in the spring.
That's as inflation is moving closer to the central bank's preferred 2% target and the economy is beginning to cool following a better-than-expected expansion over the first nine months of the year.
CME Group's FedWatch, a tool market watchers use to gauge the likelihood of changes to the Fed's key rates, suggests a 54.5% chance of a 0.25-percentage-point rate cut in March, with the odds of a move in May – including larger increases of as much as half a point – pegged at 100%.
The slump in mortgage rates could provide a much-needed shot in the arm for the U.S. housing market. It saw existing-home sales fall to the lowest levels in 13 years this fall, according to data from the National Association of Realtors. Average prices rose 3.4% to around $391,800.
"Prospective home buyers experienced another difficult month due to the persistent lack of housing inventory and the highest mortgage rates in a generation," said NAR Chief Economist Lawrence Yun.
"While circumstances for buyers remain tight, home sellers have done well as prices continue to rise year-over-year, including a new all-time high for the month of October."
However, the housing market is seeing some modest signs of recovery amid the slide in overall mortgage rates. And single-family housing starts edged 0.2% higher in October, the Census Bureau said last month, to an annualized rate of 970,000 units.
Permits for new construction surged the most in more than 18 months as builders looked to fill the gap between a dearth of new supply and a lack of existing-home sales.
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