Mortgage rates drop under 7%, but how long will they stay there?

Continuing their downward trend of recent weeks, rates for the 30-year fixed mortgage fell back under 7% for the first time since April 11, Freddie Mac said.

The 30-year FRM declined 8 basis points, to 6.94% on May 23 from the prior week's 7.02%, the Freddie Mac Primary Mortgage Market Survey reported. For the same week in 2023, the rate averaged 6.57%.

Meanwhile the 15-year FRM had a smaller drop of 4 basis points to 6.24% from 6.28%, but up from 5.97% one year ago.

This creates an "unexpected windfall" for homebuyers, said Freddie Mac Chief Economist Sam Khater.

"Although this week's data on previously owned home sales showed a decline, total inventory of both new and existing homes is up," Khater said in a press release. "Greater supply coupled with the recent downward trend in rates is an encouraging sign for the housing market."

The drop in rates took place even though the 10-year Treasury went through some gyrations in the past seven days. It closed at 4.38% on May 16, with a low of 4.32% that day.

The next day's intraday low was 4.39%, while the 10-year yield hit a high of 4.46% on Wednesday and in early trading on Thursday reached 4.5%, and by 11:30 a.m. was at 4.49%.

Other indicators, which use different methodologies (Freddie Mac uses rates on Loan Product Advisor submissions), were higher on the week-to-week comparison.

Lender Price product and pricing engine data on the National Mortgage News website at 11:30 a.m. on Thursday had the 30-year FRM at 7.03%, up from 6.856% seven days prior.

The Zillow website had the 30-year fixed at 6.71% at that time, up 4 basis points from Wednesday's 6.67% and 7 basis points from the previous week's average of 6.64%.

The minutes from the last Federal Open Market Committee meeting caused bond investors to reassess their forecasts for inflation and the economic outlook," said Orphe Divounguy, senior economist at Zillow Home Loans, in a Wednesday night statement.

While the April data showed inflation is once again moving in the right direction, "there are still questions among Fed committee members about whether policy is restrictive enough to bring inflation down to the 2% target," Divounguy said. "Although a moderation in consumer spending is expected to pull inflation lower, progress on inflation has been modest at best in the first quarter."

Divounguy pointed to the prevailing view that the FOMC will make one or two rate cuts this year. When it comes to mortgages, the Personal Consumption Expenditures price index report next week should likely cause some repricing activity.