In a positive development for the US housing market, the average rate on the 30-year mortgage has dipped to 6.95%, its lowest level since August. This marks the seventh consecutive week of falling rates, providing relief for homeowners and prospective buyers who have been struggling in an expensive and sluggish market. According to the latest data from Freddie Mac, the drop in mortgage rates can be attributed to a combination of overall inflation deceleration and the likelihood of future rate cuts.

The decline in mortgage rates is a crucial factor in revitalizing the housing market, which has seen a decline in activity over the past year due to affordability concerns. Homeowners have been hesitant to sell their properties to avoid losing their low-interest rates, while potential buyers have struggled to afford the rising financing costs. As a result, pending home transaction volume has hit a two-decade low.

Housing experts are now hopeful that the trend of falling rates will continue. Sam Khater, the chief economist at Freddie Mac, emphasized that as inflation continues to decelerate and with expectations of the Federal Reserve Board lowering the federal funds target rate, the housing market is likely to gradually improve in the new year.

The recent Consumer Price Index (CPI) data supports the prediction of future rate cuts. The CPI revealed that inflation moderated to 3.1% year-over-year in November, bringing it closer to the Federal Reserve's target rate of 2%. This encouraging sign suggests that the central bank will be inclined to implement rate cuts in the coming months.

Lawrence Yun, chief economist at the National Association of Realtors (NAR), predicts that the Federal Reserve could begin reducing rates as early as spring, with a potential decrease of up to 100 basis points by the end of next year. If these predictions hold true, average mortgage rates could potentially reach around 6.3%.

Several experts in the field believe that further rate cuts below the 6% range would have a meaningful impact on the housing market. Lower rates would not only reduce borrowing costs but also stimulate demand and increase inventory, leading to a potential decrease in home prices. Danielle Hale, chief economist at Realtor.com, explained that such rate reductions would weaken the lock-in effect that has discouraged homeowners from selling their properties.

While the overall inflation rate has shown signs of deceleration, the housing component of the Consumer Price Index remains elevated. Housing prices and rent have experienced monthly climbs of 0.4% and annual increases of 6.5% in November, respectively. However, Lawrence Yun suggests using private sector rental data, which only shows a 1% to 2% increase in rents, indicating a potential oversupply of apartments in certain regions.

As the Federal Reserve remains committed to taming inflation, interest rates are currently steady at 5.25%-5.50%. However, during the recent FOMC meeting, Federal Reserve Chair Jerome Powell conveyed the possibility of future rate cuts, projecting a decrease to 4.6% by the end of 2024 should the economy align with their projections.

The decline in mortgage rates offers a glimmer of hope for the housing market, which has been grappling with affordability challenges. As rates continue to decrease, there is optimism that the market will experience a gradual recovery, bringing relief to homeowners and buyers alike.