Mortgage Rates Hit 3-Year Low: What It Means for Homebuyers

Mortgage rates are now at their lowest level in over three years. What does that mean for homebuyers and the economy? Read on for all of the details.

Mortgage Rates Reach Their Lowest Point in 3 Years

According to Freddie Mac, the average 30-year fixed mortgage rate landed at 6.06% for the week ending January 15. You have to go back to September of 2022 to find the last time that home borrowing rates were this low.

Economic experts are hopeful that these rates could help to move things along in the static housing market. Sam Khater, Freddie Mac's chief economist, noted that weekly purchase applications and refinance activity have both increased over the last week. Khater said that the signals are pointing to a strong spring sales season, offering hope that the rates are making a difference.

To offer a point of comparison, the average 30-year fixed rate was at 7.04% this time last year. This means that buyers purchasing a home at $450,000 with a 20% down payment would have been on the hook for monthly principal and interest payments totaling just over $2,400. Applying today's 30-year rate to these same parameters would yield a monthly payment of $2,172. This difference equates to a savings of approximately $230 per month or nearly $84,000 over the three-decade loan.

President Donald Trump is making housing affordability a cornerstone of his domestic agenda for the new year. Earlier in January, the president called on Fannie Mae and Freddie Mac to purchase $200 billion in mortgage bonds. The goal of this purchase was to send borrowing costs lower in an attempt to stimulate the housing market. According to the president, the purchase will drive mortgage rates and monthly payments down, putting home ownership in reach for more Americans.

Some real estate professionals believe that the mortgage bond purchases may already be working to bring down mortgage rates in the short term, despite the purchases not reaching the $200 billion mark yet. The big question now is how low the rates will fall.

"Lock-in Effect" Starting to Loosen

A data analysis out of Realtor.com indicates that what is known in industry circles as the "lock-in effect" is starting to loosen its grip. This effect describes how homeowners are reluctant to sell their homes after securing low rates. For several years, homeowners have decided to stay put after scoring low mortgage rates in the early weeks and months of the COVID-19 pandemic.

The lock-in effect has been partly to blame for the stagnant housing market as rates inched back up from the record-low levels seen during the pandemic. In addition, the lock-in effect is often blamed for declining inventory levels, as both buyers and sellers are hesitant to make any major decisions until rates are more favorable.

However, this effect is starting to weaken as the percentage of homeowners with mortgage rates over the 6% benchmark is now higher than that of those with rates below 3%. This data signals that fewer homeowners have enough financial incentive to remain in their current homes.

What do the latest numbers say about the state of the housing market? According to a recent report from the National Association of Realtors (NAR), sales of previously owned homes soared 5.1% in December compared to November. This is the fourth consecutive month of gains, marking the longest streak dating back to the middle of 2020 during the peak of the pandemic.

Despite the lower rates, prices have yet to come down. According to NAR, the median existing home sales price came in at $405,400 in December. This increase marked the 30th straight month of year-over-year price jumps.

Although more activity across the housing market is not likely to bring home prices down, it will bring about other benefits to a sluggish economy. These positive impacts will be amplified as the lock-in effect continues to loosen. More people feeling increasingly confident about making a move will create a domino effect across the housing industry, also giving the economy a bit of a boost.

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