(CNN) — Mortgage rates dropped for the second week in a row, notching the largest decline since December, 2008.
The 30-year fixed-rate mortgage averaged 5.30% in the week ending July 7, down from 5.70% the week before, according to Freddie Mac. That is still significantly higher than this time last year when it was 2.90%
Rates rose sharply at the start of the year, hitting a high of 5.81% in mid-June. But since then, economic concerns have pushed them lower. The 40 basis point fall offset some of the significant rate increases of May and June.
“Over the last two weeks, the 30-year fixed-rate mortgage dropped by half a percent, as concerns about a potential recession continue to rise,” said Sam Khater, Freddie Mac’s chief economist.
But affording a home still remains a challenge. Mortgage rates are at their highest levels since the late 2000’s and listing prices have grown by more than 8.5% year-over-year for 24 consecutive months, said Joel Berner, Realtor.com’s senior economic research analyst.
If there’s any silver lining for homebuyers, it’s that more homes are hitting the market, he said. In June, active listings increased by the largest annual growth in the history of Realtor.com’s data.
“With more homes on the market, sellers are being forced to compete on prices,” he said. “Though the cost of financing a home remains high relative to recent years, buyers will have more chances to find homes in their price range as the undersupplied and overheated housing market starts to cool.”
Higher rates are also tamping down demand among prospective buyers. Mortgage applications dropped 5.4% in the week ending July 1 from the week before, according to the Mortgage Bankers Association.
“Rates are still significantly higher than they were a year ago, which is why applications for home purchases and refinances remain depressed,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting. “Purchase activity is hamstrung by ongoing affordability challenges and low inventory, and homeowners still have reduced incentive to apply for a refinance.”
Buyers are finding it harder to buy homes as inflation takes a larger chunk of their income and the cost of borrowing has reduced their purchasing power.
A year ago, a buyer who put 20% down on a median priced $390,000 home and financed the rest with a 30-year, fixed-rate mortgage at an average rate of 2.90% had a monthly mortgage payment of $1,299, according to calculations from Freddie Mac.
Today, a homeowner buying the same priced house with an average rate of 5.30% would pay $1,733 a month in principal and interest. That’s $434 more each month.
The decline in mortgage rates this week follows recent volatility in the 10-year Treasury yield, which dropped below 2.8% in the first week of July after spending most of June above 3%.
While the Federal Reserve does not set the interest rates borrowers pay on mortgages directly, its actions influence them. Mortgage rates tend to track 10-year US Treasury bonds. As investors see or anticipate rate hikes, they often sell government bonds, which sends yields higher and with it, mortgage rates.
In addition, continued fears that we are heading into a bear market have driven investors into safer, longer-term bonds, said Berner.
“This inversion might sound ominous, especially in the midst of sustained inflation that both markets and the Fed agree will likely require more fed funds rate hikes to tame, but it remains to be seen whether these market conditions will lead to increases in the unemployment rate or decreases in production that characterize a recession,” he said.
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