Editor’s Note: Freddie Mac, which has tracked weekly average mortgage rates since 1971 and has periodically made changes to its Primary Mortgage Market Survey, changed the source of its data as of November 17, 2022. Instead of surveying lenders, the weekly results will be based on applications received by lenders that are submitted to Freddie Mac. Find more about Freddie Mac’s change here.

Mortgage rates dropped sharply last week following a series of economic reports that indicated inflation may finally be easing.

The 30-year fixed-rate mortgage averaged 6.61% in the week ending November 17, down from 7.08% the week before, according to Freddie Mac, the largest weekly drop since 1981. A year ago, the 30-year fixed rate stood at 3.10%.

Mortgage rates have risen throughout most of 2022, spurred by the Federal Reserve’s unprecedented campaign of hiking interest rates in order to tame soaring inflation.

In the last week, two key inflation reports – the Consumer Price Index and Producer Price Index – showed that prices rose at a slower pace than expected in October, suggesting inflation is inching in the right direction, and has perhaps even peaked.

“While the decline in mortgage rates is welcome news, there is still a long road ahead for the housing market,” said Sam Khater, Freddie Mac’s chief economist. “Inflation remains elevated, the Federal Reserve is likely to keep interest rates high and consumers will continue to feel the impact.”

The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey only includes borrowers who put 20% down and have excellent credit. But many buyers who put down less money upfront or have less than perfect credit will pay more than the average rate.

Inflation appears to be easing

Investors saw last week’s lower-than-expected CPI data as an indication that the Federal Reserve may make smaller interest rate hikes in the months ahead, said George Ratiu, Realtor.com’s manager of economic research.

While the Fed does not set the interest rates borrowers pay on mortgages directly, its actions influence them. Mortgage rates tend to track the yield on 10-year US Treasury bonds. As investors see or anticipate rate hikes, they make moves which send yields higher and mortgage rates rise.

“The 10-year Treasury dropped from 4.15% last Wednesday to 3.68%, as capital markets seemed to cheer the slowdown in inflation as a sign that the Federal Reserve’s monetary tightening is having its intended effect,” Ratiu said.

Even though inflation data is moving in the right direction, the Fed has said it does not expect to back off of raising rates until inflation gets closer to the desired target of 2%.

Still, the downshift in mortgage rates over the past week has brought a sliver of relief to buyers, said Ratiu.

A buyer purchasing the median-priced home with a 20% down payment at last week’s average rate of 7.08%, was facing a monthly payment of about $2,280, according to Realtor.com. At a rate of 6.61%, the same buyer would see their payment fall to $2,174. While the $100 in savings a month may not seem like much, over the course of a 30-year loan, the buyer would save close to $48,000 in interest.

Those savings spurred some home buyers to sweep in and lock in a lower mortgage rate.

Mortgage applications increased for the first time in seven weeks, according to the Mortgage Bankers Association, with both purchase and refinance applications up.

“Signs of slowing inflation pushed mortgage rates below 7% for the first time since mid-October, but with rates still relatively high and affordability correspondingly reduced, the average loan amount is now at its lowest level in nearly two years,” said Bob Broeksmit, president and CEO of the MBA.

Affordability challenges persist

Affording a home remains a challenge for many home buyers. Mortgage rates are expected to remain volatile for the rest of the year. And prices remain elevated in many areas, especially where there is a very limited inventory of available homes for sale.

Meanwhile, inflation and rising interest rates mean many would-be buyers are also facing tightened budgets.

“For consumers, quickly rising prices have added significant financial pressures, especially as inflation erodes any wage gains,” said Ratiu. “The Fed’s rate hikes are directly tied to higher interest rates for credit cards and car loans, which along with higher mortgage debt, adds additional burdens to household finances.”

More than 20% of listings have seen price cuts, as sellers adjust their strategy to meet buyers in a changing financial landscape, according to Realtor.com.

“On one hand, sellers have been coming to terms with the fact that homes priced for the housing market we experienced when rates were at 3% leave very few buyers able to manage the mortgage payments with today’s rates,” said Ratiu. “On the other hand, buyers may hesitate to move forward with transactions if they find the erratic nature of current mortgage rates disconcerting.”

The volatility in mortgage rates is not expected to let up in the near future, causing uncertainty for both buyers and sellers.

“With inflation still north of 7% and the Fed committed to keep increasing the funds rate over the next few months, the mortgage market is not out of the woods,” said Ratiu. “We may still see rates rebound back above 7% before the end of the year.”