Mortgage Rates Drop for First Time in 2 Months

Mortgage rates fell for the first time in two months this week as investors sought safety in government bonds, spurred by cooling stock and tech markets and a sharp pullback in new-housing starts fueling inflation fears. 

The average rate on 30-year fixed home loans decreased to 7.32% for the week ending Oct. 22, down from 7.40% the prior week, according to Freddie Mac. The decline follows seven consecutive weeks of gains that sent mortgage rates to three-year highs. 

For perspective, rates averaged 6.19% one year ago.

“The average 30-year fixed-rate mortgage declined this week, offering some relief to prospective homebuyers,” says Sam Khater, Freddie Mac’s chief economist.

The main driver behind this reversal is the 10-year Treasury yield, which averaged roughly 5.13% over the past several days, down from 5.24% the week before-the result of investors adopting a more cautious stance as they follow the ongoing conflict in Iran and await initial unemployment claims data. 

It also comes on the heels of worse-than-expected housing data, with housing starts plunging in September 5.2% month over month and 7.4% year over year, according to a report from the U.S. Census Bureau released on Tuesday. 

During the same period, pending home sales dropped to the lowest level on record, according to the National Association of Realtors®, reflecting priced-out buyers’ withdrawal from the market.

“Mortgage rates edging down is welcome news, but we should not get carried away, as today’s modest decline does not put much of a dent in this fall’s surge that saw rates climb 74 basis points in just over a month,” says Realtor.com senior economist Jake Krimmel. 

Looking ahead, the Federal Reserve rate picture— like the inflation numbers—has firmed up considerably. 

The odds of the central bank holding the federal funds rate steady at the current 3.75%-4% range at next week’s meeting of the Federal Open Market Committee (FOMC) have risen from 42% a month ago to 66% a week ago and around 85% for most of this week, according to CME FedWatch. 

Meanwhile, December hike odds have hovered near 90% the whole time, suggesting that the bond market has likely already priced in both a hold next week and a rate increase in two months’ time. 

“So the question moving forward with the 10-year, and with mortgage rates by extension, is how high the floor is for rates over the next several months and whether we are already there or still have somewhere to go,” says Krimmel. 

For the housing market, mortgage rates comfortably in the 7% range is reshaping the balance between buyers and sellers. The Realtor.com Market Clock® tool shows the national reading at 4 o’clock—a late balanced market trending toward buyers, with about two-thirds of the top 100 metros either favoring buyers outright or moving that way. 

However, gaining market leverage and gaining affordability are two different things. Rates climbing from 6.66% in late August to 7.4% on Oct. 8 translated into a 7.2% loss of purchasing power for buyers across the board. 

“Even if buyers claw back a bit of that with rates edging down this week, the damage to the fall housing market is already done,” says Krimmel, pointing to the bleak pending sales figure and Realtor.com data showing contract signings down 9.8% year over year. 

This week, the number of homes for sale rose 7.7% compared to a year ago, the highest weekly growth rate since late January. Inventory has been building momentum throughout the fall, rising from roughly 4% year-over-year growth in late August to nearly 8% now.

At the same time, the median asking price held steady week-to-week at $415,000.

How your credit score affects your mortgage

Your credit score plays a role when you apply for a mortgage. A credit score will determine whether you qualify for a mortgage and the interest rate you’ll receive. The higher the credit score, the lower the interest rate you’ll qualify for.

The credit score you need will vary depending on the type of loan. A score of 620 is a “fair” rating. However, people applying for a Federal Housing Administration loan might be able to get approved with a credit score of 500, which is considered a low score.

Homebuyers with credit scores of 740 or higher are typically considered to be in very good standing and can usually qualify for better rates, which can reduce monthly payments.