Cooling Employment and Inflation Eases Fed Rate Hike Pressure, U.S. Mortgage Rates Fall for First Time in Six Weeks

According to Zhitong Finance APP, U.S. mortgage rates have declined for the first time in six weeks. The latest employment and inflation data show that the U.S. labor market is cooling, and the impact of the Iran war on July inflation may be less than previously feared, leading the market to lower expectations for a near-term Fed rate hike. However, U.S. mortgage rates remain at the highest levels in over a year, and high borrowing costs continue to dampen real estate market demand.

Data released by Freddie Mac on Thursday shows that the average 30-year fixed mortgage rate in the U.S. fell slightly from 6.69% the previous week to 6.67%, ending a streak of five consecutive weekly increases. Despite this retreat, mortgage rates are still at a high level not seen in over a year.

Recently released inflation data has somewhat eased market concerns that the Iran war will drive up U.S. prices. U.S. year-over-year inflation in July slowed for the second consecutive month, with energy, gasoline, and grocery prices all falling compared to the previous month. Another measure of underlying inflation pressures fell to the same five-year low seen in February this year, indicating that the war's impact on overall U.S. inflation remains relatively limited for now.

Meanwhile, the July employment report showed U.S. hiring was weaker than previously reported, with a surprising decline in payrolls that month. The cooling signals from both employment and inflation have eased pressure on the Fed to raise rates further in the coming months.

According to the CME FedWatch tool, after the release of July's Consumer Price Index (CPI), the market-implied probability of a 25 basis point Fed hike at the September meeting fell from 48% the previous day to 38%.

However, Joel Berner, Senior Economist at Realtor.com, believes there may still be limited room for mortgage rates to fall further in the future. On one hand, conflict in the Middle East continues to present upside risks to inflation; on the other hand, the Fed remains highly focused on bringing inflation down further. He expects the current level of mortgage rates could become the norm in the market over the coming months.

Middle East tensions remain a key uncertainty for the outlook on U.S. rates and inflation. Negotiations between Tehran and Washington over the Strait of Hormuz are still deadlocked, and international oil prices remain elevated. The International Energy Agency (IEA)'s latest monthly report predicts the global oil market supply gap this quarter will reach 1.8 million barrels per day—more than double prior forecasts. Brent crude is currently trading near $87 a barrel, after briefly dropping below $80 in early August.

Persistently high mortgage rates and economic uncertainty continue to suppress U.S. housing demand. Data from Redfin shows U.S. home sales fell 4.1% month-over-month in July, seasonally adjusted, dropping to the lowest level in nearly two years.

At the same time, many U.S. homeowners locked in historically low mortgage rates during the pandemic, and are now reluctant to sell existing homes and take on higher financing costs, keeping market supply constrained. This "lock-in effect" is also keeping U.S. home prices elevated despite weak demand.

According to the National Association of Realtors (NAR), the median sale price of existing U.S. homes reached $434,100 in July, up 2% year-on-year and still near its previous record high.

Chen Zhao, Head of Economic Research at Redfin, said that many Americans currently cannot afford housing costs, while some potential buyers are choosing to delay home purchases due to concerns over the economic outlook.

Overall, cooling employment and inflation have ended the five-week run of rising mortgage rates in the U.S., but the average 30-year fixed mortgage rate remains high at 6.67%. Against a backdrop of ongoing Middle East conflicts, elevated oil prices, and lingering Fed policy uncertainties, there is limited room for mortgage rates to fall sharply in the near term, and the U.S. real estate market continues to face multiple pressures from high borrowing costs, high home prices, and constrained supply.