Mortgage rates experienced a slight decrease during the week ending Nov. 14, which marked the first decline in weekly rates since September. According to data provided to BW by Zillow, the average rate on a 30-year fixed-rate mortgage decreased by seven basis points to 6.79%. A basis point represents one-one hundredth of a percentage point.
Housing costs are playing a significant role in driving inflation higher. Renters, in particular, are feeling the impact of rising inflation. In October, the consumer price index (CPI) showed that more than half of the increase was attributed to rising housing costs. The shelter cost index increased by 0.4% on a seasonally adjusted basis, compared to an overall month-over-month inflation growth of 0.2%. Unadjusted, shelter costs rose by 4.9% year-over-year, exceeding the pre-pandemic average growth rate of 3.3% from 2017-2019.
The surge in housing costs could potentially hinder mortgage affordability in two ways. Firstly, it leaves potential homebuyers with less money to save each month towards a down payment. Secondly, by contributing to inflation, housing costs could influence central bankers’ decisions regarding rate cuts.
While the Federal Reserve does not directly set mortgage rates, their control over the federal funds rate impacts the interest rate that banks pay to borrow from each other overnight. This, in turn, influences mortgage rates, which tend to adjust accordingly.
Following the Federal Open Market Committee (FOMC) meeting on Nov. 7, Federal Reserve Chairman Jerome Powell mentioned that economic indicators since the September meeting had been relatively positive. However, concerns were raised regarding the slightly higher than expected inflation report.
Looking ahead, analysts expect another 25-basis-point rate cut in December. Despite ongoing inflation challenges, the Fed aims to strike a balance between inflation and employment through a relaxed interest rate policy.
As we approach the end of the year, there is uncertainty surrounding the Fed’s future rate-cutting strategies, especially given the persistence of inflation and the upcoming changes in the administration. Analysts predict a more cautious approach from the Fed in early 2025.
For renters seeking to improve mortgage affordability, exploring first-time homebuyer programs in their state could be beneficial. These programs offer various benefits such as down payment and closing cost assistance, as well as reduced interest rates, making homeownership more attainable.