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Mortgage rates decline for second week in a row

Mortgage rates dropped to 5.30 percent this week after reaching nearly 6 percent in recent weeks. (Jessica Christian/San Francisco Chronicle/AP)

Mortgage rates headed downward for the second week in a row, giving home buyers a reprieve after a dramatic climb to nearly 6 percent that will probably continue.

According to Freddie Mac data released Thursday, the 30-year fixed rate dropped to an average of 5.30 percent from 5.70 percent last week with an average 0.8 point. The average was 2.90 percent a year ago.

The average for a 15-year fixed-rate mortgage fell to 4.45 percent from 4.83 percent with an average 0.8 point. The average was 2.20 percent a year ago.

The average for the five-year adjustable-rate mortgage decreased to 4.19 percent from 4.50 percent with an average 0.4 point. The ARM was 2.52 percent a year ago. ARMs, which were 9.5 percent of applications last week, according to the Mortgage Bankers Association (MBA), have become more popular with borrowers, doubling since late 2021, when rates were lower.

Federal Reserve actions including selling off securities and raising the federal funds rate led to a rapid increase in mortgage rates this year.

“The dip in rates this week isn’t the beginning of a trend,” said Danielle Hale, the chief economist for Realtor.com. “In fact, long-term interest rates were up again the last couple of days.”

How to manage rising mortgage rates

Mortgage rates were expected to decline slightly last week because concern about the economy drove investors to seek safer assets, including bonds, Hale said. Mortgage rates typically fall when bond investment increases.

“Mortgage rates reacted abruptly to the last Fed interest rate increase and got ahead of where they need to be in anticipation of further rate increases,” Hale said. “The gap between mortgage rates and other interest rates had widened and now they’ll narrow a bit.”

Still, Hale said, anyone looking to buy a house in the next year or so should expect mortgage rates to remain above 5 percent.

“Maybe rates will dip to 4 percent in two or three years, but a lot can happen between now and then, so it’s difficult to predict,” she said.

Freddie Mac chief economist Sam Khater said in a statement that the dip in rates would not have a big impact on buyers.

“Over the last two weeks, the 30-year fixed-rate mortgage dropped by half a percent, as concerns about a potential recession continue to rise,” Khater said. “While the drop provides minor relief to buyers, the housing market will continue to normalize if home price growth materially slows due to the combination of low housing affordability and an expected economic slowdown.”

The potential risk of recession influenced mortgage rates last week and could affect future Fed interest rate hikes, according to Paul Thomas, Zillow’s vice president for capital markets.

“Investors are pricing in more risk of economic slowdown and a potential recession, which may slow the pace of future interest rate hikes at the Federal Reserve,” Thomas said in a statement. “Economic indicators released last week pointed to slower growth in consumer spending and manufacturing in the first quarter and prior month, with results below market expectations. This furthered the recession risks being priced in markets. Equity markets declined and bond markets rallied, driving the U.S. 10-year Treasury yield below 3 percent for the first time since early June.”

Higher mortgage rates in recent months have led to declines in mortgage applications for refinancing and for home purchases, according to the MBA.

“Purchase activity is slowing down as shoppers contend with both scant home inventory and affordability challenges from rising rates and home prices,” Thomas said. “Investors will be focused on the Federal Open Market Committee (FOMC) minutes and speakers for any further hints on Fed actions to tame inflation, along with jobs and employment data releases later in the week.”

Mortgage applications for home purchases declined 4 percent during the week ending July 1 compared to the previous week when seasonally adjusted and were down 17 percent compared to that same week in 2021. Refinancing applications were 78 percent lower than one year earlier.

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