Mortgage Rates Move Lower as Economic Outlook Worsens

Mortgage interest rates improved slightly this week, though that's not much comfort given the state of the world. In truth, it's actually a sign of how negative the economic outlook's becoming.

The average rate on a 30-year fixed-rate mortgage fell to 6.25% APR in the week ending April 9, according to rates provided to NerdWallet by Zillow. A basis point is one one-hundredth of a percentage point.

Mortgage rates are still solidly above 6%, and we aren't seeing the kind of steady decline we saw in February. April rates have gradually eroded a few basis points a day, so they haven't been grabbing headlines, let alone dramatically changing the picture for prospective home buyers. Here's what's been going on.

Why mortgage rates are falling

Mortgage rates rose rapidly in March as the market reacted to potential inflation risks, with damage to oil production facilities and throttled shipping through the Strait of Hormuz causing fuel prices to spike. As we've moved into April, mortgage rates have started easing downward — but it's not because things are looking brighter.

"The big shift is that markets are starting to see the conflict in the Middle East and higher oil prices as less of a short-term inflation story and more of a longer-term growth story," said Jeff DerGurahian, chief investment officer and head economist at LoanDepot, in an email commentary. In other words, it's not just where higher gas or grocery prices are today; it's how these price pressures may be shifting consumers' and businesses' planning.

"The current pressures on household finances can be thought of in two categories: those from changes being experienced right now and those that people are anticipating. Real changes include higher gas prices and a labor market that isn’t conducive to advancement. Anticipated changes include things like the fear of recession and everything that could entail," explains Elizabeth Renter, NerdWallet senior economist.

If people (and companies) start to rein in their spending because of anticipated changes, those fears become a self-fulfilling prophecy. "While this can prepare them for a potential economic downturn, it can also impact the real economy. In time, this restrained spending can pull down overall economic growth," Renter says.

New data rolling in

On one hand, slower consumer and business spending could help cool inflation. When there's less demand, there's less room for price growth. But on the other hand, weaker spending could cool the whole economy.

This makes the Federal Reserve's job that much trickier when it meets at the end of this month. The Fed doesn't set mortgage rates, but it controls a key short-term interest rate that influences economic growth. In general, when inflation's running hot, the Fed raises that rate to curb borrowing and spending.

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This morning's Personal Consumption Expenditures Price Index (PCE) — which is pre-war February data — showed that inflation was already accelerating. So-called core PCE, which strips out the food and fuel prices that we expect to be especially volatile, hit 3% year-over-year in February. Even though right now February feels like it must have been a glorious time with much cheaper gas, clearly, things weren't that great.

Normally, April releases would all feature March data. But as different federal agencies play catch-up from last fall's government shutdown, we're getting data from multiple months. The Bureau of Labor Statistics is up to speed, so tomorrow we'll see March's Consumer Price Index (CPI). Current market predictions show a much more significant year-over-year overall increase with just a modest uptick in core CPI.

The Federal Reserve targets a 2% rate of inflation, which is something we haven't seen in five solid years. At their March meeting, the Fed governors shifted their inflation predictions for 2026 higher. But their predictions for 2027 and onward show that they don't expect higher inflation to last. That'll be great if it's because inflation's actually slowing. It'll be way less good if inflation drops because the economy's worsening.

What should home buyers do?

Markets react in real time, and so we see mortgage rates move constantly, too. And while homeowners looking to refinance may have the flexibility to act quickly on a rate drop, potential home buyers often lack that luxury. Buying a home is a huge decision and a lengthy process. You're more likely to lock in your mortgage rate because you had an offer accepted than because of that day's rates.

If you're financially and emotionally ready to commit to homebuying this spring, don't let mortgage rate news dismay you. Yes, we saw interest rates go below 6% in February, but right now we're only a quarter of a percentage point over that threshold. Today's rates are also substantially lower than last year's. The same week last year, rates were over 60 basis points higher.

This might still feel like a strange time to focus on homebuying, though, and if economic uncertainty is weighing on you, it's okay to press pause on your search. "We are seeing a historic rise in inventory which should be a catalyst for sales," said Lisa Sturtevant, chief economist for Bright MLS, via email. But for buyers to feel comfortable, "instead of just policy announcements, we will need more policy stability."

The article Mortgage Rates Move Lower as Economic Outlook Worsens originally appeared on NerdWallet.