Apache is functioning normally

Mortgage rates fell this week after the chair of the Federal Reserve uttered long-awaited, market-moving words.

“The time has come for policy to adjust,” Fed Chair Jerome Powell said Aug. 23 in a speech. Translated from Fedspeak to English, this means, “We’re going to cut interest rates soon.”

Investors already were betting that the Federal Reserve would reduce the federal funds rate at the central bank’s next meeting, Sept. 17-18. But when Powell said it out loud, he provided confirmation that markets sought. The average rate for the 30-year fixed-rate mortgage reacted by dropping 11 basis points to 6.27% in the week ending Aug. 29. A basis point is one one-hundredth of a percentage point.

Powell explained that the inflation rate seems like it’s headed toward the Fed’s goal of 2%. Meanwhile, job growth has slowed and the unemployment rate has gone up. These developments are a result of restrictively high interest rates set by the Fed.

“We do not seek or welcome further cooling in labor market conditions,” Powell said. And cutting interest rates is a way to prevent labor markets from cooling more.

Orphe Divounguy, senior economist for Zillow Home Loans, called Powell’s pronouncement “a gift to investors and home shoppers alike.” It’s a gift that’s been sitting under the tree for weeks: Mortgage rates have fallen more than a percentage point since early May.

The 30-year mortgage rate averaged 7.32% in the week ending May 2 and has tumbled since then, remaining under 6.5% for the last four weeks. The decline in rates has made homes more affordable than they were just four months ago.

“Lower rates also make it easier for existing homeowners to sell,” points out Lisa Sturtevant, chief economist for Bright MLS, a multiple listing service in the mid-Atlantic region.

In a news release, Sturtevant said the typical homeowner has a mortgage rate that’s three percentage points lower than current mortgage rates. “This rate gap has kept some homeowners from listing their home for sale. As rates fall, the rate gap is going to be less of an obstacle to sellers.”

Today’s lower rates are a boon to people who bought last fall, when mortgage rates topped 7.5%. Some of these homeowners could reduce their monthly payments substantially by refinancing.

Take the example of a borrower who got a $350,000 mortgage last October at 7.5%. By refinancing the same amount at a 6.25% rate, they could cut their monthly payment by $292. They could wait for rates to drop even lower, but each month of waiting marks $292 of savings foregone.