Mortgage Rates Expected to Decline in July Amid Falling Inflation

As inflation cools, mortgage rates are anticipated to edge lower in July.

This decrease won’t be drastic; instead, envision a slow, gentle decline, much like a marble rolling slowly across the uneven floor of a 150-year-old house.

Mortgage rates appeared to have peaked in May. While it’s uncertain until year-end, the trend has been downward since. According to Freddie Mac's weekly survey, the 30-year fixed-rate mortgage averaged 7.22% in the first week of May and fell to 6.86% in the last week of June.

This gradual decline corresponds with a decrease in inflation. From March to May, the core consumer price index dropped from 3.8% to 3.4%. Mortgage rates typically fall as inflation decreases, so further reductions in inflation could lead to continued declines in mortgage rates.

Listening to the Fed

The Federal Reserve aims to reduce the inflation rate to 2%. To achieve this, the central bank raised short-term interest rates by 5.25 percentage points in 2022 and 2023. These rate hikes have successfully lowered inflation throughout 2023. However, progress stalled in early 2024, causing the Fed to delay rate cuts.

In late June, Raphael Bostic, president of the Federal Reserve Bank of Atlanta, noted "a few promising signals" in recent inflation data, indicating that prices are moving in the right direction.

Bostic emphasized that reaching the 2% target would take considerable time, potentially longer than initially expected, given the rapid inflation decline as 2023 ended. He suggested that inflation might decrease sufficiently to justify a rate cut in late 2024 but made no promises.

Rate Cuts Might Not Translate to Affordability

Even if mortgage rates decrease, this doesn’t guarantee home affordability for everyone. In May, the median home resale price reached an all-time high of $419,300, according to the National Association of Realtors, while the average mortgage rate was around 7%.

With a 20% down payment (more than a typical first-time buyer can save), a mortgage rate of 7% results in a principal-and-interest payment of $2,232 on a median-priced home. Consequently, home sales dropped by 2.8% compared to the previous year.

As buying slowed, the inventory of existing homes for sale increased, potentially leading to softening prices, according to Mike Simonsen, president of Altos Research. In his June 25 market commentary on YouTube, Simonsen explained that 36.9% of homes on the market had reduced their asking prices.

Home prices typically peak in June, and if mortgage rates fall this autumn as expected, the combination of lower prices and interest rates could make homes slightly more affordable.

Predictions from Forecasters

Fannie Mae and the Mortgage Bankers Association forecast that mortgage rates will fall in the quarter starting in July. Both predict the 30-year mortgage rate will average 6.8% from July to September, following an average of 7% from April to June in Freddie Mac's survey.

June's Mortgage Rate Performance

According to NerdWallet's daily mortgage rate survey, the average 30-year mortgage rate averaged 6.82% in June, down from 7.01% in May. The most influential factor was the May consumer price index, which was lower than market expectations.