Home borrowing costs continue to decline and are now well below the multi-decade highs (8% / 30-year fixed) seen in November 2023, yet well above the lows seen in late 2020 (2.67%). Inflation was one of the main culprits that put rates on a roller coaster ride.
As measured by the Fed’s favorite inflation gauge, the Core Personal Consumption Expenditure (PCE), inflation was 1.55% in December 2020 and jumped to 5.57% in February 2022, pushing home borrowing costs to those multi-decade highs. As the inflation rate rose, so did rates. Why? One factor for lenders is risk as inflation could erode the real value of the money they lend. To compensate for this risk, they increase the interest rates they charge on loans.
Fast forward to today, the Core PCE has declined to 2.62% and the 30-year fixed has fallen to 6.35%. So, you can see how borrowing costs rose and fell as inflation data heated up and then cooled.
What’s ahead? Not only has inflation cooled but so have oil prices. High oil prices are inflationary as they cause higher production and transportation costs. As a result, the trickle-down effect results in higher costs for consumer goods. Oil prices have dropped due to concerns that China, the world’s biggest crude importer, will decrease its demand in the coming months. Lower demand equals lower prices.
And where the market already knows that the Federal Reserve will cut rates in September it may have already factored it in, it still supports lower borrowing costs ahead.
However, potential buyers still face some headwinds, but they are easing. The inventory of homes for sale on the market is still low but has been improving. If rates can be pushed low enough, it could motivate homeowners locked in at low rates to move so inventory grows considerably to meet demand. Home prices are still frothy but if borrowing costs can continue to decline, that could ease some of the pain.
Bottom line: As the economy continues to slow, the housing environment is improving. There will always be demand for the American Dream of homeownership. It’s not an easy task nowadays, but it is reachable.
Source: Mortgage Market Guide
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