Mortgage rates plunged by nearly a half-percent this week, marking the largest week-over-week decline since November 1981.
The rate on the average 30-year fixed mortgage fell to 6.61% from 7.08% the week prior, according to Freddie Mac, which this week changed its methodology calculating rates. The drop follows a sharp decline in the yield on the 10-year Treasury last week after a government showed inflation cooled last month.
The sudden decrease gave price-strained homebuyers and sellers still in the market an inkling of relief, boosting activity in the otherwise sluggish market.
"The drop in rates incentivized buyers to rush and try to lock rates this weekend, the difference in demand was significant,” Adriana Perezchica, president of Via Real Estate, told Yahoo Money. “Until recently, buyer demand had weakened as borrowers have had a hard time keeping up with higher rates and home prices. We don’t know how long this dip in rates will last…and buyers are absolutely racing to lock a rate."
This week’s results also debuts Freddie Mac’s revised methodology, which now collects real-time rates based on loan applications submitted to its automated underwriting system. The new approach has an average difference of less than 10 basis points.
Buyers rush to secure lower rates
Buyers made strategic moves as rates fell. Demand for mortgages spiked last week with the volume of purchase applications increasing 4%, according to the Mortgage Bankers Association’s latest survey of applications.
While Freddie Mac reported that the average 30-year mortgage had topped 7% last Thursday, that same day the government released new inflation data, which came in weaker than expected. That prompted the yield on the 10-year Treasury — which fixed mortgage rates tend to track — to plunge by more than 32 basis points to 3.816%, below its recent average of 4%.
The 10-year Treasury bonds fell even lower this week, dropping to 3.716% Wednesday.
“Mortgage rates moved very much in line with last week’s 10-year Treasury collapse. In fact, it was the single greatest daily reduction in mortgage rates that I can remember in over 20 years,” Jeffrey Ruben, president at WSFS Mortgage, told Yahoo Money last week. “The 30-year fixed rate mortgage went from just over 7% down to 6.5% in a single day.”
According to Perezchica, the dip in rates boosted one of her client’s purchasing power – upping the borrower’s pre-approved mortgage budget from $430,000 to $490,000.
“My client’s mortgage rate dropped from 8.2% to 6.5% in one day. That’s huge,” Perezchica said. “It means that the same buyer will be able to afford a home in an area closer to the city and won’t have to settle for a home that’s either further away or smaller.”
Still, higher home prices and continued inflation pressures keep fueling housing affordability concerns, especially as historically low rates remain fresh in buyers’ minds. The volume of purchase applications, for example, is still down 46% from a year ago when rates were at 3.10%.
“Buyers may hesitate to move forward with transactions if they find the erratic nature of current mortgage rates disconcerting,” George Ratiu, manager of economic research at Realtor.com, said in a news statement. “Some buyers may want to wait and see if rates will drop even lower. However, with inflation still north of 7%, the mortgage market is not out of the woods.”
Home sellers remain cautious
The slump in demand is disappointing for sellers. The share of respondents in a Fannie Mae survey who said it’s a good time to sell decreased from 59% in September to 51% in October.
Home builders are feeling similarly despondent about the market, with confidence in the industry falling for the 11th straight month, according to the National Association of Home Builders.
To encourage buyers in the market, home sellers are slowly adjusting their price expectations.
The share of homes with a price reduction was 20.9% in October, up from 10.6% a year ago, according to Realtor.com. In November, 37% of builders cut prices this month, up from 26% in September, with the average price reduction of 6%. Builders are also offering to buy points and buy-downs for buyers.
It may not be enough for some budget-constrained buyers.
“Higher rates and elevated home prices have been tough on home sales,” Perezchica said. “Even with this dip in rates, some buyers I’ve talked to have expressed their uncertainty about a potential recession and their ability to afford a monthly mortgage payment in the near future. They don’t know if now is the right time to buy.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.