While the 30-year mortgage rate has improved and is again on a downward trajectory, it is crucial to acknowledge that it is still relatively high. However, mortgage rates are currently at 6.08% (as of Sept. 26), their lowest point in over a year, and down from 7.22% in early May.
The 30-year mortgage rate has dropped to its lowest level in two years, boosting market optimism about the housing sector and buyer affordability, as further interest rate cuts by the Fed are anticipated in November and December. The medium- to long-term outlook for the housing market has improved by this development.
Fed Rate Cuts to the Rescue
A decline in the Federal funds rate, which typically has an indirect impact on the mortgage rate, may prove advantageous for borrowers. Increasing expectations of further interest rate cuts toward the end of 2024 appear poised to provide relief to the housing market.
According to the CME FedWatch Tool, the Fed will reduce interest rates in November, with a 52.7% probability that they will decrease to 4.5-4.75% and a 47.3% likelihood of them falling to 4.25-4.5%.
The likelihood of a further fall in interest rates becomes more prominent toward December, with the rates potentially dropping to 4-4.25%, supported by a likelihood of 50.1%. Interest rates may witness a further drop to 3.75-4%, with a 20.9% likelihood supporting this estimate.
Homebuyers may take time to adjust to the declining interest rates. With expectations of further rate cuts, they may even put a hold on purchasing in the hope of securing even lower rates. As a result, the housing market’s recovery could be gradual, but improvement is on the horizon.
Encouraging Trends in Housing Affordability
Increasing mortgage rates have been putting a strain on housing affordability for over two years. However, with rates now declining and further drops expected following the Fed’s recent interest rate cut, affordability is finally improving.
This is supported by Redfin’s recent report, as quoted on Yahoo Finance. Redfin's homebuyer demand index, which tracks home tours and agent services, saw a 1% year-over-year increase, reaching its highest level since May, pointing toward improving housing market conditions.
Per Yahoo Finance, purchase mortgage applications have surged over 10% compared to August. Signs of improving housing affordability have been highlighted by a report from Attom. The report from Attom compared the median home price to average national wages in the second quarter of 2024, revealing that homeownership costs now consume a smaller portion of wages.
Additionally, the Mortgage Bankers Association reported a 5.2% decrease in the national median mortgage payment for applicants between July and August.
ETFs to Consider
Increased investor confidence that the Fed will implement further interest rates in 2024 paints a rosy near-term outlook for the housing market, suggesting a continued downtrend in mortgage rates. Projections of a drop in mortgage rates increase the purchasing power of potential homeowners and investor interest, improving affordability.
Below, we have highlighted a few funds for investors to capitalize on the market’s optimistic outlook.
iShares U.S. Home Construction ETF ITB
iShares U.S. Home Construction ETF has gained 13.98% over the past three months and 40.90% over the past year.
SPDR S&P Homebuilders ETF XHB
SPDR S&P Homebuilders ETF has gained 11.65% over the past three months and 42.35% over the past year.
Invesco Building & Construction ETF PKB
Invesco Building & Construction ETF has gained 5.39% over the past three months and 34.53% over the past year.
Hoya Capital Housing ETF HOMZ
Hoya Capital Housing ETF has gained 13.96% over the past three months and 29.51% over the past year.
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