US mortgage rates in sharp fall as economic jitters seep into housing

US mortgage rates fell at the fastest pace since 2008 in the past week, as economic jitters in bond markets feed through to home loans at a time when dwelling costs are at historic highs.

The average interest rate charged on a 30-year fixed-rate mortgage dropped for a second consecutive week to 5.3 per cent, down from 5.7 per cent the week before, Freddie Mac, the government-backed home loan agency, said on Thursday.

The decline partially reverses a swift and steep rise in mortgage rates this year that has followed the Federal Reserve’s aggressive campaign to combat inflation by raising benchmark interest rates. A year ago mortgage rates averaged 2.9 per cent.

Higher mortgage rates have compounded pressures on home buyers as tight supply drives up prices. The median US home price in May climbed above $400,000 for the first time, a 14.8 per cent increase from a year before, according to the National Association of Realtors.

“While the [mortgage rate] drop provides minor relief to buyers, the housing market will continue to normalise if home price growth materially slows due to the combination of low housing affordability and an expected economic slowdown,” said Sam Khater, Freddie Mac’s chief economist.

Mortgage rates closely track movements in Treasury bond yields. The yield on the 10-year Treasury note reached a peak of almost 3.5 per cent in June, its highest level since 2011. It has since fallen about 0.5 percentage points and is now trading below 3 per cent, reflecting concerns that the Fed’s monetary tightening could result in slower growth or a recession.

Mortgage applications dropped by 5.4 per cent last week from the previous week, according to the Mortgage Bankers Association.

“Purchase activity is hamstrung by ongoing affordability challenges and low inventory, and homeowners still have reduced incentive to apply for a refinance,” said Joel Kan, MBA’s associate vice-president of economic and industry forecasting.

According to Black Knight, a real estate data company, annual home price growth decelerated in May. The slowdown was the biggest since 2006, near the peak of the US subprime housing bubble.

“While any talk of home values and 2006 might set off alarm bells for some, the truth is that price gains would need to see deceleration at this rate for more than 12 months just to get us back to a ‘normal’ 3-5 per cent annual growth rate,” said Ben Graboske, president of data and analytics at Black Knight.