Good news on the home-buying front: after months of mortgage rates trending upward, fueled by rising inflation and the US Federal Reserve’s hiking base rates to combat that inflation, signs have begun to emerge that the average home lending rate in the United States has begun to decline instead. Let’s take a closer look at just what’s at play in the world of mortgage rates and what they might have in store for us going forward deeper into 2023.
The news broke on April 13th when it was revealed by Freddie Mac that average mortgage rates had declined for the fifth straight week in a row, dropping from 6.28 percent to 6.27 percent. This single hundredth of a percentage point might not feel like much of a difference, but this is where perspective is important: the previous week, rates came down from 6.32 percent. It’s even more significant when you look back at the last high before this downward trend began; on March 9th, Freddie Mac found average lending costs were at 6.73 percent, clearly showcasing just how much more affordable home loans have become over those five weeks.
Through the lens of year-on-year mortgage rate changes, of course, it’s even more obvious how the real estate landscape has changed. In April 2022, mortgage rates were at around 5 percent. Later that year, as the Fed continued to raise base rates even further, the industry hit a new high of 7.08 percent in November. As the Fed has indicated that the era of a fast and furious pace of rate hikes has come to a close, the slow easing of interest rates in the mortgage world shows that the real estate industry is beginning to normalize.
The Freddie Mac research study is certainly good news for anyone who has their fingers on the pulse of the real estate sector. Whether you’re a real estate professional hoping to see more business come your way or if you’re someone looking to buy or sell a home soon, lower interest rates are great news. After all, as lending becomes more affordable, it’s easier for buyers to afford to purchase properties. While we might not see the historic lows we were experiencing prior to the Fed’s rate increases in early 2022, a “new normal” might be on the way based on this trend.
Be aware, however, that there are some limitations baked right into the information Freddie Mac has furnished us. The most important thing to keep in mind is that the statistics in the report only include borrowers who have ideal circumstances. Every borrower in the survey put at least 20 percent down on their mortgage; additionally, they all had very good credit ratings. This means that the Freddie Mac survey is less of an “average” and more of the best-case scenario. Unless you, as a prospective home buyer, can afford to place a large down payment on a property purchase and have excellent credit, the mortgage rates offered to you are likely to be higher than 6.27 percent.
Yet regardless of whether you’re in the same advantageous position as a preferred borrower or not, the writing on the wall is still clear: mortgage rates are going down across the board. Even for a borrower who has less than perfect credit or can’t afford to place 20 percent down on a mortgage can and will still benefit from the overall downward trend the industry is exhibiting. The question now, of course, is whether it’s a good idea to look for a mortgage now or if you should wait longer to see if rates decline even further.
There are some indications as to what we can expect in the future. Inflation has begun to recede, as a recent CNN article points out that US inflation fell in March to its lowest level since May of 2021. At the same time, inflation is still up more than twice as high as its target level. That means there’s still more work to be done. The more inflation comes down on its own, the less likely that the Fed will issue another rate increase. This means mortgage rates will continue to trend downward, which will perhaps make home lending even more affordable in the weeks or months to come.
So what’s a prospective homeowner to do? It can be tempting to capitalize on today’s lower mortgage rates, as this means you can more easily afford to purchase that property you’ve had your eye on for some time. Yet a home is a major investment, and it’s always a good idea to make the smartest financial decisions you can when it comes to a purchase that can quite literally mean taking out hundreds of thousands of dollars in lending. Holding off for that mortgage rate to decline a bit more could result in some serious savings over the life of your loan.
At this point in time, the decision to wait at least a few weeks might be wise. The real estate markets are in constant flux, and there’s always a chance that rates might increase instead of decrease, but if you keep a close eye on the price of lending going forward you should be able to make a determination for yourself, according to your own circumstances. We’re not likely to see those ultra-low mortgage lending rates of 3 percent again any time in the immediate future, so keep this in mind while you’re racking your brains deciding to commit or not.