Mortgage rates drop to a two-month low: Here's how much a buyer would need to put down to afford monthly payments

By Aarthi Swaminathan

The 30-year mortgage rate falls for a third week in a row

Mortgage rates fell to their lowest level since mid-April, pressured down by market expectations for the Federal Reserve to cut interest rates in response to a slowing U.S. economy.

The 30-year fixed-rate mortgage averaged 6.87% as of June 20, according to data released by Freddie Mac (FMCC) on Thursday.

That's down 8 basis points from the previous week. One basis point is equal to one hundredth of a percentage point.

Rates are down for the third week in a row.

A year ago, the 30-year rate was averaging 6.67%.

The average rate on a 15-year mortgage was 6.13% as of June 20, down from 6.27% last week. The 15-year rate was at 6.03% a year ago.

Freddie Mac's weekly report on mortgage rates is based on thousands of applications received from lenders across the country that are submitted to Freddie Mac when a borrower applies for a mortgage.

Separate data from Mortgage News Daily said that the 30-year fixed-rate mortgage was averaging 7.02% as of Thursday afternoon. The Mortgage Bankers Association's survey noted that the 30-year rate was at 6.94% as of June 14.

The big picture: Mortgage rates ride on the market's expectations of a Fed rate cut. The more data that comes in showing a slowing U.S. economy, the more the market factors in a potential cut in interest rates by the central bank, which in turn would trigger a drop in mortgage rates.

But it's unclear if a drop in rates would be enough to cool an expensive housing market. Even as mortgage rates fall, offering a reprieve to home buyers, home prices continue to climb to new highs.

The national median sale price was $396,000 as of June 16, according to data from real-estate brokerage Redfin. That's up 4.8% from a year ago.

Buyers looking for a monthly payment they can afford are having to come up with a big down payment. To comfortably afford payments on a median-priced home - meaning that monthly housing costs would amount to a maximum 30% of household income - a buyer would need to put down $127,750, according to an analysis by real-estate brokerage Zillow. That's roughly 35% of a median-priced home's value.

In some markets, the desire for a comfortable monthly payment comes at an even steeper cost. A median-income household in San Jose, Calif., one of the most expensive housing markets in the U.S., would need to put down more than $1.3 million to bring their monthly mortgage payments down to an affordable level. That's 81% of the value of a typical home in that market.

What Freddie Mac said: "These lower mortgage rates coupled with the gradually improving housing supply bodes well for the housing market," Sam Khater, chief economist at Freddie Mac, said in a statement. "Aspiring homeowners should remember it's important to shop around for the best mortgage rate, as they can vary widely between lenders."

What are economists saying? The key phenomenon that would bring down home prices is the easing of the lock-in effect - and that isn't going to happen just yet, Jiayi Xu, an economist at Realtor.com, said in a statement.

"Significant drops in mortgage rates are necessary to encourage more sellers to re-enter the market. Notably, as of the end of 2023, over 50% of outstanding mortgages have rates at 4% or lower, and 87% have rates at 6% or lower," Xu said.

"While it's unlikely for mortgage rates to fall below 4%, a rate around 6% could strongly motivate many sellers to list their homes, thereby increasing overall inventory and exerting downward pressure on housing prices," she added.

Realtor.com is operated by News Corp subsidiary Move Inc., and MarketWatch publisher Dow Jones is also a subsidiary of News Corp.

-Aarthi Swaminathan

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06-20-24 1210ET

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