Buyers should keep an eye on the possibility of rate cuts in the next few months. Tharon Green/CNET
Every time the average 30-year fixed mortgage rate dips, even by a few tenths of a percentage point, prospective homebuyers jump to take advantage. As soon as rates move up again, mortgage activity goes down. The past few weeks offer a textbook example.
When rates fell to around 6.7% (the lowest level in months) in early July, applications for home loans promptly ticked up, according to the Mortgage Bankers Association. But when the average 30-year fixed rate jumped to around 6.8% last week, mortgage activity plummeted 10%.
"Purchase applications remained sensitive to both the uncertain economic outlook and the volatility in rates," said Joel Kan, the MBA's vice president and deputy chief economist, in a statement.
The key to understanding mortgage rate movement is by looking at inflation and labor data and how that affects the bond market. Mortgage interest rates are closely tied to the 10-year Treasury. Bond market investors drive yields (rates) higher or lower based on their expectations for inflation, unemployment, Federal Reserve policy decisions and government debt.
Last month's surprisingly low unemployment rate reduced the probability of an interest rate cut by the Fed this summer. "The headline labor market data isn't crashing and burning, which likely gives the Fed some cover to hold rates where they are," said Alex Thomas, senior analyst at John Burns Research and Consulting. While the Fed doesn't have direct control over the mortgage market, its monetary policy guides mortgage lenders and the general direction of interest rates.
Experts say average 30-year fixed mortgage rates are likely to stay above 6.5% in the coming months, with a potential for small and temporary dips, not substantial drops. Prospective homebuyers are also contending with a long-standing housing shortage, high home prices and a loss of purchasing power.
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What's driving mortgage interest rates this week?
Mortgage rates, which are sensitive to investor speculation and economic data, have been affected by the Trump administration's tax cuts and tariff policies. If tariffs end up raising prices as expected, that would send an even clearer "wait and see" signal to central bank policymakers, whose primary task is keeping both inflation and unemployment in check.
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