Interest rates at the far end of the yield curve are already declining, despite ongoing discussions about when and by how much the Federal Reserve will lower the federal funds rate. This trend is attributed to diminished market expectations for long-term inflation and near-future short-term rates.
The yield on 10-year U.S. Treasuries, considered a benchmark long-term interest rate, has been decreasing over the past four months, reaching just under 4 percent in early September. This figure is significantly below last October's decade-high levels of around 5 percent. Mortgage rates have also been falling; the average 30-year fixed rate dropped to 6.4 percent in late August, nearly 90 basis points lower than in May. Last October, 30-year mortgage rates were nearing 8 percent.
Lower mortgage rates are beginning to thaw the previously stagnant housing market. The supply of homes for sale has been limited partly due to many potential sellers reluctant to list their properties as they do not want to relinquish existing mortgages with historically low-interest rates. As mortgage rates moderate, this situation is gradually improving. The number of active residential listings has increased steadily this year. Additionally, mortgage refinance applications have nearly doubled compared to this time last year, allowing households to reduce debt service burdens and free up funds for other uses—beneficial for the overall economy.
However, while lower mortgage rates stimulate both home demand and supply, their impact on housing prices remains uncertain. They also do not address one of the economy’s persistent issues: a crisis in housing supply and affordability. Nonetheless, reduced rates represent progress toward alleviating these challenges.