Home mortgage demand surges as rates drop to 6.35%

Mortgage rates are finally falling, and just saw their biggest weekly drop in the past year. The average interest rate for a 30-year fixed-rate mortgage in the past week was 6.35%, according to Freddie Mac, down from 6.5% a week earlier.

That’s the lowest average since last October. Rates have been above 6.5% for most of the last year, climbing above 7% in January.

“Mortgage rates are headed in the right direction and homebuyers have noticed, as purchase applications reached the highest year-over-year growth rate in more than four years,” said Sam Khater, Freddie Mac’s chief economist.

As rates dropped, borrower demand surged. Applications to buy a home and to refinance were both up on a weekly and annual basis, according to the Mortgage Bankers Association.

Refinances made up nearly half of those applications, as those who bought homes at higher rates jumped at the chance to lower their monthly mortgage payments. Purchase applications, meanwhile, rose to their highest level since July.

Why are rates dropping now? 

The Treasury yields that affect mortgage rates moved lower with the data that the labor market is weakening. The jobs report last week showed that U.S. employers added just 22,000 jobs in August, and a revised report on Tuesday showed that hiring for the last 12 months ending in March was much lower than initially tallied.

The Federal Reserve is expected to cut the fed funds rate at its meeting next week, despite fresh data showing that inflation inched higher last month — with prices on consumer goods up 2.9% from a year ago. But a rate cut may not mean a drop in mortgage rates, as the expectation of a cut is already likely priced into current rates.