This week, mortgage rates have dipped to their lowest levels since February 2023, offering some relief to Americans dealing with a challenging housing market. According to Freddie Mac, a major mortgage financing company, the average rate for a standard 30-year fixed-rate mortgage was 6.20% as of September 12, down from 6.35% the previous week and significantly lower than the peak of 7.79% in October 2023. The decline began last month following news suggesting lower future interest rates, particularly after a July jobs report that was less robust than anticipated.

Freddie Mac's chief economist, Sam Khater, noted that mortgage rates have dropped by more than half a percentage point over the past six weeks. Despite this positive trend, potential homebuyers are still hesitant due to high housing prices and ongoing supply constraints. Economic indicators suggesting slower inflation and a softening job market have set the stage for the Federal Reserve to consider its first interest rate cut since 2020, which is expected at the central bank's upcoming policy meeting.

While the Fed does not set mortgage rates directly, its decisions influence them through the movement of bond yields. The 10-year US Treasury yield, which is anticipatory of the Fed's interest rate decisions, has fallen in recent weeks as data indicates easing price pressures and a less heated job market.

However, even with reduced borrowing costs, the US housing market remains out of reach for many potential homeowners, especially those with lower incomes in cities experiencing rapid home price increases, such as New York City, San Diego, and Las Vegas, according to S&P Global data. Renters across the country are also facing difficulties, with those in major urban areas like New York, Los Angeles, and Miami spending more than 30% of their income on rent, as reported by a recent Moody’s analysis of rents and family incomes.

A significant factor contributing to the housing affordability crisis in the US is a chronic shortage of homes on the market. Supply has not kept pace with demand for various reasons, including construction costs, complex zoning regulations, limited land for development, and in some cases, a lack of workers for home construction. Additionally, many homeowners are choosing to stay put with the lower mortgage rates they secured before the Fed began raising rates to combat inflation in 2022.

There have been some positive developments this year, with total housing inventory improving every month, according to the National Association of Realtors. By the end of July, it had reached 1.33 million units, a 0.8% increase from June and a 19.8% increase from the previous year. However, this is still insufficient to meet demand. The ongoing affordability issues have also led to sluggish housing demand, with sales of existing homes, which represent the majority of the market and serve as an indicator of housing demand, increasing by 1.3% in July, ending four consecutive months of decline. Despite this uptick, Lawrence Yun, the NAR’s chief economist, stated that "home sales are still sluggish."