Mortgage rates tumble to 4.99%, lowest in 3 months

Mortgage rates in the US slipped below 5% for the first time in almost four months, giving borrowers a reprieve after this year's rapid surge.

The average for a 30-year loan fell to 4.99% from 5.3% last week, Freddie Mac said Thursday in a statement. That's the lowest since early April and the biggest one-week drop since early July.

Sub-5% is still significantly higher than this time last year when rates ran 2.77%. Rates rose sharply at the start of the year, hitting a high of 5.81% in mid-June. But since then, economic concerns have made them more volatile.

The decline in rates may help some homebuyers who were priced out this year by the fastest rising borrowing costs in decades. The Federal Reserve's campaign to curb inflation by driving up its benchmark rate is putting an end to the pandemic housing boom. Sales are now sinking and inventory is starting to climb.

"Mortgage rates remained volatile due to the tug of war between inflationary pressures and a clear slowdown in economic growth," said Sam Khater, Freddie Mac's chief economist. "The high uncertainty surrounding inflation and other factors will likely cause rates to remain variable, especially as the Federal Reserve attempts to navigate the current economic environment."

Still costly

The higher costs to finance a home have already had an impact on buyers. Sales of both new construction and existing homes have fallen in recent months as buyers take a break from house hunting.

Buyers are finding homes even less affordable as inflation takes a larger chunk of their income and the rising cost of borrowing has reduced their purchasing power.

A year ago, a buyer who put 20% down on a $390,000 home and financed the rest with a 30-year, fixed-rate mortgage at an average interest rate of 2.77% had a monthly mortgage payment of $1,277, according to numbers from Freddie Mac.

Today, a homeowner buying the same priced house with an average rate of 4.99% would pay $1,673 a month in principal and interest. That's nearly $400 more each month.

Recession ahead?

The US economy has been marching toward a recession with the economy shrinking for a second straight quarter, according to data released last week. But there have been positive signs lately, with growth in the US services sector unexpectedly strengthening to a three-month high in July.

"Capital markets are seeking a stronger directional signal about economic activity amid the push-and-pull of consumer spending and business investments," said George Ratiu, Realtor.com's manager of economic research. "Without a clear direction, markets are confining mortgage rates to move within a tighter range, as the sharp upward push has moderated."

In response to high inflation the Federal Reserve raised its benchmark interest rate by 75 basis points last week, the second hike of that size in as many months.

The Federal Reserve does not set the interest rates borrowers pay on mortgages directly. Instead, mortgage rates tend to track 10-year US Treasury bonds. But they are indirectly impacted by the Fed's efforts to tame inflation.

As for consumers, he said, they continue to spend, amassing a record $16.2 trillion in household debt according to data the Federal Reserve released this week.

"The big question for consumers is whether companies will over-react to the recession concerns and start trimming payrolls," Ratiu said. "A sharp pullback in hiring could have a direct impact on people's ability to keep spending, especially with today's high inflation."

Bloomberg and CNN contributed to this report.