Mortgage rates tumbled to a 15-month low this week, prompting a flurry of refinancing activity, although buying a home will likely remain tough for a while.
Rates are still significantly higher than they were a few years ago, leaving many homeowners with low-cost loans reluctant to move.
The average interest rate on a 30-year, fixed-rate mortgage fell to 6.47% this week, according to Freddie Mac.
That's down from 6.73% a week ago and 6.96% this time last year. The drop in mortgage rates follows a sharp reduction in yields in government bonds after last week's weaker-than-expected jobs report.
Mortgage rates tend to track the yields set by investors in the country's Treasury market.
Many people with more expensive home loans hustled to take advantage of the falling rates. Refinancing applications jumped 16% last week, according to the Mortgage Bankers Association.
So far, there's been little uptick in new mortgage applications from would-be homebuyers — though lower financing costs could eventually make buying a home more affordable.
"Despite the downward movement in rates, purchase activity only saw small gains," says Joel Kan, deputy chief economist for the MBA. "Homebuyers might be biding their time to enter the market given the prospect of lower rates.”
It's still a tough housing market
Interest rates are still substantially higher than they were in 2020 and 2021, when many homeowners took the opportunity to secure mortgages at rock-bottom rates. Three-quarters of all current mortgage-holders have interest rates below 5%, and more than half are paying less than 4%, according to Pantheon Macroeconomics.
The historically large gap between today's elevated mortgage rates and the low rates that prevailed a few years ago have discouraged many current homeowners from moving, since giving up their low-cost loans would boost their annual mortgage payments by thousands of dollars.
"Imagine somebody who has a job opportunity somewhere else and it's a good job opportunity," says Berkeley economist Jesse Rothstein. "If their monthly payment will double when they do that, then all of a sudden that move doesn't make sense."
'The mortgage rate lock'
In a new working paper, Rothstein estimates that "mortgage rate lock" prevented some 800,000 households from moving during the year ending last June and reduced mobility by 16%.
By comparison, mobility among homeowners without mortgages showed little change.
"It is a sizeable impact on the market and I think it's part of the reason why there are fewer 'For Sale' signs out," Rothstein says. "Anything that kind of stops people from moving when there's some other location that would be a better fit for them now is reducing the fluidity of the housing market."
As mortgage rates begin to fall, the lock-in effect will be reduced, Rothstein says, but only slightly.
"You unlock a few people with every drop."
Rothstein says rates would have to fall significantly more — to 5% or so — before many homeowners would be willing to give up their low-cost loans.
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