Mortgage rates fall by the most in 41 years

Mortgage rates plunged nearly half a percent this week, marking the biggest weekly drop since November 1981.

The average 30-year fixed mortgage rate fell to 6.61% from 7.08% the previous week, according to Freddie Mac, who this week changed his methodology for calculating rates. The drop follows a sharp drop in the 10-year Treasury yield last week after a government showed inflation cooled last month.

The sudden decline gave price-pressed home buyers and sellers still on the market a hint of relief, boosting activity in the otherwise sluggish market.

“The drop in rates encouraged buyers to rush and try to lock in rates this weekend. The difference in demand was significant,” Adriana Perezchica, president of Via Real Estate, told Yahoo Money. “Until recently, buyer demand has weakened as borrowers have had a hard time keeping up with higher rates and home prices. We don’t know how long this drop in rates will last…and buyers are competing to secure a rate.”

This week’s results also feature Freddie Mac’s revised methodology, which now collects rates in real time based on loan applications submitted to its automated underwriting system. The new approach has an average difference of less than 10 basis points.

Buyers rush to secure lower rates

Buyers made strategic moves as rates fell. Demand for mortgages skyrocketed last week and the volume of purchase applications increased 4%, according to the latest application survey from the Mortgage Bankers Association.

While Freddie Mac reported that the average 30-year mortgage had topped 7% last Thursday, the same day the government released new inflation data, which was weaker than expected. That caused the 10-year Treasury yield, which fixed mortgage rates tend to track, to fall more than 32 basis points to 3.816%, below its recent average of 4%.

10-year Treasuries fell further this week, falling to 3.716% on Wednesday.

“Mortgage rates moved very much in line with the collapse of the 10-year Treasury last week. In fact, it was the largest daily reduction in mortgage rates that I can remember in over 20 years,” Jeffrey Ruben, president of WSFS Mortgage, told Yahoo Money last week. “The 30-year fixed-rate mortgage went from just over 7% to 6.5% in a single day.”

Open house on a home for sale in Sherman Oaks. According to the Mortgage Bankers Association, homebuyer activity soared during the week ending November 11, as prospective buyers took advantage of lower rates. (Credit: Lawrence K. Ho, Los Angeles Times via Getty Images)

According to Perezchica, the drop in rates boosted the purchasing power of one of his clients, increasing the borrower’s pre-approved mortgage estimate from $430,000 to $490,000.

“My client’s mortgage rate dropped from 8.2% to 6.5% in one day. That is huge,” Perezchica said. “It means that the same buyer will be able to afford a house in an area closer to the city and not have to settle for a house further away or smaller.”

Still, higher home prices and continued inflationary pressures continue to fuel concerns about home affordability, especially as record-low rates remain fresh in buyers’ minds. The volume of purchase requests, for example, is still 46% lower than a year ago when rates were at 3.10%.

“Buyers may hesitate to proceed with transactions if they find the erratic nature of current mortgage rates disconcerting,” George Ratiu, manager of economic research at Realtor.com, said in a news release. “Some buyers may want to wait and see if rates will drop further. However, with inflation still above 7%, the mortgage market is not out of the woods.”

Real estate agent Steve Bremis pulls out a

Real estate agent Steve Bremis puts up an “Open House” sign for three condos for sale in Somerville, Massachusetts. (Credit: Brian Snyder, REUTERS)

Home sellers remain cautious

The drop in demand is disappointing for sellers. The proportion of respondents to a Fannie Mae survey who said it is a good time to sell decreased from 59% in September to 51% in October.

Homebuilders are similarly down on the market, with confidence in the industry falling for the 11th straight month, according to the National Association of Home Builders.

To encourage buyers into the market, home sellers are slowly adjusting their price expectations.

The share of homes with a price reduction was 20.9% in October, up from 10.6% a year ago, according to Realtor.com. In November, 37% of builders cut prices this month, up from 26% in September, with an average price cut of 6%. Builders also offer buy points and rebates for buyers.

It may not be enough for some budget-minded buyers.

“Higher rates and elevated home prices have been tough on home sales,” Perezchica said. “Even with this drop in rates, some buyers I’ve spoken to have expressed uncertainty about a possible recession and their ability to afford a monthly mortgage payment in the near future. They don’t know if now is the right time to buy.”

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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