M
ortgage rates have dropped steeply this week, reaching their lowest level in 15 months according to Freddie Mac's latest survey. The 30-year fixed-rate mortgage averaged 6.35% this week, down from 6.46% last week and marking the lowest level since May 2023. The 15-year fixed-rate mortgage averaged 5.51% this week, significantly below the 6.55% rate of a year ago.

    Despite these declining rates, potential homebuyers have not been responding with much enthusiasm. This is evident in the drop in pending sales in July, which fell 8.5% year-over-year according to the National Association of Realtors (NAR). The NAR's sales index, a forward-looking indicator of home sales, fell to 70.2 last month, the lowest reading in its 23-year history.

    The lack of sales recovery in midsummer is attributed to several factors, including affordability challenges and uncertainty related to the upcoming U.S. presidential election. Redfin estimates that pending sales have decreased by 6.9% year-over-year for the four weeks ending Aug. 25. Buyers are also waiting for clarity on the NAR settlement and hoping for a drop in home prices after reaching record highs this summer.

    The latest data on mortgage purchase applications showed a slight increase from the previous week, but applications are still down 9% year-over-year according to the Mortgage Bankers Association. This weak demand may cause sellers to take note and slow down the pace of new homes hitting the market, particularly in Texas and Florida where the pace of new homes hitting the market is already slowing down.

    Inventory remains higher than in recent years heading into fall, which could lead to a late-year uptick in sales if the Federal Reserve chooses to make deeper rate cuts in September. However, a significant rate cut would be needed for this to happen since a modest rate cut is already priced in, according to Ralph McLaughlin, senior economist at Realtor.com.

    In conclusion, while mortgage rates have dropped steeply this week, potential homebuyers have not been responding with much enthusiasm. The drop in pending sales and the slowdown in new homes hitting the market suggest that buyers are playing a waiting game. The Federal Reserve's decision in September will be a key factor in determining whether sales will rebound or not.