Expectations that the Federal Reserve will soon begin cutting interest rates have driven mortgage rates to their lowest levels in over a year Wednesday, positively impacting both new mortgage applications and refinancing of existing loans.

The average contract interest rate for 30-year fixed-rate mortgages — with conforming loan balances of $766,550 or less — fell significantly by 27 basis points to 6.55% for the week ending Aug. 2, marking the lowest rate since early May 2023

The decrease of 27 basis points from the rate of 6.82% on July 26 represents the largest weekly drop since July 2022 and reflects sizable reductions in Treasury yields.

The 30-year Treasury yield, a key benchmark for mortgage costs, dropped 34 basis points during the week ending Aug. 2, reaching approximately 4.2%.

“Mortgage rates decreased across the board last week…following dovish communication from the Federal Reserve and a weak jobs report, which added to increased concerns of an economy slowing more rapidly than expected,” said Joel Kan, the Mortgage Bankers Association’s vice president and deputy chief economist.

Chart: 30-Year Mortgage Rates Drop To Levels Last Seen In May 2023

Demand For Mortgages Jumps, Driven By Lower Interest Rates

Mortgage applications soared by 6.9% during the week ending Aug. 2, the sharpest increase in nearly two months and fully erasing the cumulative declines in applications from the two prior weeks. 

Applications for a loan to refinance a mortgage, which are more sensitive to weekly changes in interest rates, soared by nearly 16%. The MBA Mortgage Refinance index rose to the highest level in two years.

Although the Federal Reserve kept the federal funds target unchanged at its July meeting, it hinted at a possible rate cut in September. Market speculation around a Fed rate cut sharply increased as a result of a weaker-than-expected July jobs report.

Commenting on the data, MBA chief economist Mike Fratantoni said: “The weakness in this report including the slower rate of wage growth and the higher unemployment rate certainly support such a cut, but the next inflation report needs to confirm that price growth is also slowing.

"The market is moving ahead of the Fed, bringing down longer-term rates including those for mortgages, which should lead to both more home purchases and a pickup in refinance activity," he said.

Market Reactions

Shares of real estate companies surged in premarket trading on Wednesday, with the Vanguard Real Estate ETF (NYSE:VNQ) rising by 0.8%, following a 2% gain on Tuesday. The VNQ ETF is on course to reach levels not seen since January 2023.

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