Mortgage rates drop for fifth week in a row

Washington, DC(CNN) Mortgage rates fell once again this week, dipping for the fifth straight week.

The 30-year fixed-rate mortgage averaged 6.31% in the week ending December 15, down from 6.33% the week before, according to Freddie Mac. A year ago, the 30-year fixed rate was 3.12%.

Mortgage rates have risen throughout most of 2022, spurred by the Federal Reserve's unprecedented campaign of harsh interest rate hikes to tame soaring inflation. But mortgage rates have tumbled in the last several weeks, following data that showed inflation may have finally reached its peak.

Inflation, as measured by the Consumer Price Index, cooled considerably in November and was at its lowest level in nearly a year, according to the Bureau of Labor Statistics' closely watched index, released on Tuesday.

However, the Fed announced on Wednesday that it will continue to raise interest rates — albeit by a smaller amount than it has been, while acknowledging that inflation is easing. The rate hike was already factored in to where mortgage rates are, but signaled more good news on inflation.

"Mortgage rates continued their downward trajectory this week, as softer inflation data and a modest shift in the Federal Reserve's monetary policy reverberated through the economy," said Sam Khater, Freddie Mac's chief economist.

"The good news for the housing market is that recent declines in rates have led to a stabilization in purchase demand," he added. "The bad news is that demand remains very weak in the face of affordability hurdles that are still quite high."

The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit. Many buyers who put down less money upfront or have less-than-perfect credit will pay more than the average rate.

Inflation picture improves

"While this move was largely expected by investors, the Fed signaled to capital markets at yesterday's meeting that it sees its aggressive monetary tightening having an effect on inflation," said George Ratiu, Realtor.com's manager of economic research.

While the Fed does not set the interest rates borrowers pay on mortgages directly, its actions influence them. Mortgage rates tend to track the yield on 10-year US Treasury bonds. When that rate goes up, the 30-year fixed-rate mortgage typically goes up, too. When the Treasury rate goes down, so do mortgage rates.

But this isn't the end of rate hikes.

Fed Chair Jerome Powell mentioned in his remarks that with prices still rising at a high rate, more rate increases are needed and the central bank remains committed to rate hikes until the pace of inflation notches a noticeable slowdown, Ratiu said.

"For investors, the Fed's tightening still presents the risk of pushing the economy into a recession in 2023," he said. "However, most economic indicators continue to show signs of resilience. Additionally, this week's Consumer Price Index data showed continued moderation in the price growth trajectory."

What this means for real estate markets is that the continued cooling in inflation measures should ease the upward pressure on mortgage rates, said Ratiu.

"While a return to the 3.0% range is not likely in the near future, even a flattening of rates in the 5.5% - 6.0% range in 2023 would offer housing markets an improved foundation," he said.

Mortgage applications tick up

For people looking to buy a home, and homeowners wanting to sell, the retreat in mortgage rates over the past several weeks has been welcome.

"With more homes available for sale, and more of them sporting price cuts, some buyers are running the math and finding that the slide in rates is offering better options within their budgets," said Ratiu.

After a month of declines, mortgage applications ticked up last week as buyers looked to take advantage of several weeks of slightly lower rates, according to the Mortgage Bankers Association.

"Overall, applications increased, driven by increases in purchase and refinance activity," said Joel Kan, MBA's vice president and deputy chief economist. "However, with rates more than three percentage points higher than a year ago, both purchase and refinance applications are still well behind last year's pace."

The MBA expects the recent downward trend in mortgage rates to continue, said Bob Broeksmit, president and CEO of the MBA. These lower rates, he said, "along with moderating home prices, should encourage more homebuyers to return to the market in early 2023."