By Lucia Mutikani
WASHINGTON (Reuters) -U.S. mortgage rates dropped to the lowest level in more than 1-1/2 years this week and could fall further after the Federal Reserve cut interest rates for the first time since 2020.
The average rate on the popular 30-year fixed-rate mortgage fell to 6.09%, the lowest since February 2023, from 6.20% last week, mortgage finance agency Freddie Mac said on Thursday. It averaged 7.19% during the same period a year ago.
The average rate on the 15-year fixed-rate mortgage fell to 5.15%, also the lowest reading since February 2023, from 5.27% last week. That compared to an average of 6.54% a year ago.
The U.S. central bank on Wednesday cut its benchmark overnight interest rate by 50 basis points to the 4.75%-5.00% range.
Lower borrowing costs are unlikely to have a major impact on the housing market this year, though declining mortgage rates could encourage more homeowners to put their homes on the market. Most home owners have mortgage rates below 4% and the so-called "rate lock" starved the market for previously owned homes of supply. Lower borrowing costs could, however, stimulate demand that outpaces supply, keeping house prices elevated.
Mortgage finance agency Fannie Mae on Wednesday estimated that existing homes sales this year would be the lowest since 1995, citing affordability challenges.
Fed Chair Jerome Powell told reporters on Wednesday that "the real issue with housing is that we have had and are on track to continue to have not enough housing," adding that "this is not something that the Fed can really fix, but I think as we normalize rates, you will see the housing market normalize."
The 30-year fixed-rate mortgage was, however, unlikely to drop below 5.0% before 2027, Fitch Ratings said on Thursday.
Olu Sonola, head of U.S. economic research at Fitch Ratings, said the 30-year fixed-rate mortgage and the U.S. 10-year Treasury yield had already priced in the Fed's larger-than-usual half-percentage-point cut. The 30-year fixed-rate mortgage tracks the 10-year Treasury note.
"Even with further cuts, declines in the 30-year mortgage rate to around 5.0% are contingent on the spread over 10-year Treasuries reverting to the 10-year pre-pandemic average of 1.8 percentage points," Sonola said. "The 10-year yield has less room to decline following the rate cut after declines this summer in anticipation of easing monetary policy."