In anticipation of a potential interest rate cut by the Federal Reserve in September, mortgage rates have already begun to decline, offering favorable borrowing costs for homebuyers. The average rate on a 30-year fixed-rate mortgage has dropped to its lowest point since early February, according to data from Freddie Mac. Last week, rates were recorded at 6.73%, down from a peak of over 7.2% earlier this year. The downward trend continued this week as stocks declined and bonds rallied, causing the average rate to dip as low as 6.3%, marking the lowest level in more than a year.

The decline in mortgage rates follows a decrease in the yield on the 10-year Treasury note, which reached its lowest level in over a year on Monday, trading below 3.7% at session highs. This drop in Treasury yields has historically led to a corresponding decrease in mortgage rates. Douglas Duncan, chief economist at Fannie Mae, explained that as bond traders have already factored in an anticipated rate cut by the Federal Reserve, mortgage rates have adjusted accordingly. The expectation of a rate cut has already had a resetting effect on the market.

While the decline in mortgage rates presents a favorable environment for potential buyers, recent housing data reflects ongoing challenges with affordability. Despite the drop in rates, applications for mortgages to purchase homes only increased by 1% last week, remaining 11% lower compared to the previous year. Home prices reached a new high in June for the second consecutive month, indicating that homeownership remains out of reach for many prospective buyers. Moreover, the pace of existing home sales has slowed, reflecting the increasing difficulty in finding affordable housing amidst rising inventory.

On the other hand, current homeowners are taking advantage of the lower rates to refinance existing loans. The Mortgage Bankers Association reported a 16% increase in applications for home loan refinancing last week. With expectations growing that the Federal Reserve will cut rates by half a percentage point in September, further reductions in mortgage rates could be on the horizon.

LoanDepot's Chief Investment Officer and Head Economist, Jeff DerGurahian, explained that while the 30-year mortgage rates can continue to decrease before the actual rate cut by the Federal Reserve, any additional drop is likely to be limited until more certainty is obtained regarding the timing and magnitude of the initial rate cut.

As the market eagerly awaits the Federal Reserve's decision on interest rates in September, the downward trajectory of mortgage rates is expected to entice both potential buyers and homeowners seeking to refinance their loans. With the potential for further decreases in mortgage rates, the real estate market could experience a boost, potentially alleviating some of the affordability challenges faced by buyers.

In summary, mortgage rates have reached their lowest levels in over a year as expectations mount for an impending interest rate cut by the Federal Reserve. While affordability challenges persist in the housing market, the decline in rates offers an encouraging opportunity for potential buyers and homeowners looking to refinance. The market eagerly awaits further guidance from the Federal Reserve on the timing and extent of the rate cut and its potential impact on the overall real estate landscape.