Mortgage rates will likely continue dropping as the Fed signals it will begin to lower interest rates.  (iStock)

Mortgage rates reacted to positive economic data by dropping for a second week in a row, according to Freddie Mac.

The average 30-year fixed-rate mortgage was 6.95% for the week ending June 13, according to Freddie Mac's latest Primary Mortgage Market Survey. That's a decrease from the previous week when it averaged 6.99%, but up from 6.69% a year ago. 

The average rate for a 15-year mortgage was 6.17%, down from 6.29% last week and up from 6.10% last year. 

The dip in rates followed a positive inflation report showing a slight softening in consumer prices. On an annual basis, prices rose 3.3% in May, down from the 3.4% growth last month and below market expectations. On a monthly basis, prices remained unchanged after rising 0.3% the previous month. Economists surveyed by Dow Jones had been looking for a 0.1% monthly gain and a 3.4% annual rate.

Inflation continues to moderate towards the 2% target level set by the Federal Reserve. Despite the progress, the central bank intends to keep interest rates higher until it builds more confidence that inflation is moving in the right direction. On Wednesday, it announced it would maintain the federal funds rate range at 5.25% to 5.5%, where rates have held steady since last July. 

"Mortgage rates continued to fall back this week as incoming data suggests the economy is cooling to a more sustainable level of growth," Freddie Mac's Chief Economist Sam Khater said. "Top-line inflation numbers were flat but shelter inflation, which measures rent and homeownership costs, increased showing that housing affordability continues to be an ongoing impediment for buyers on the house hunt."

If you're considering becoming a homeowner, it could help to shop around to find the best mortgage rate. Visit Credible to compare options from different lenders and choose the one with the best rate for you.

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Mortgage applications on the rise

The slight dip in mortgage rates has spurred more activity in the market. Mortgage applications rebounded 15.6% for the week ended June 7 on a seasonally adjusted basis, according to data released by the Mortgage Bankers Association (MBA). Without adjustments, the index climbed 26% from a week ago.

Mortgage refinancings increased 28% from the previous week and were 28% higher than one year ago. Lower mortgage rates spurred a "strong increase" in refinance activity, especially for Veterans Affairs borrowers, "who jumped on the chance to lower their rates," Mike Fratantoni, the Mortgage Bankers Association (MBA) SVP and Chief Economist said. 

Mortgage rates have risen mainly in sync with interest rates and an easing in interest rates would likely lower borrowing costs. However, even without an interest rate cut, mortgage rates have started to drop and are expected to continue falling this year, with the MBA forecasting them to drop as low as 6.5%.

"After two weeks of declines, mortgage applications increased more than 15 percent, as borrowers acted on slightly lower mortgage rates," MBA President and CEO Bob Broeksmit said. "A further decline in mortgage rates, coupled with reports of rising inventory levels in markets across the country, is good news for prospective homebuyers this summer."

If you'd like to see if you qualify for a mortgage based on your current credit score and salary, consider visiting Credible, where you can compare multiple mortgage lenders at once.

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Fed holds key to unlocking more housing inventory

The drop in borrowing costs is a break for home buyers but is likely insufficient to incentivize homeowners locked into historically low mortgage rates to move. A meaningful rate drop would require the Fed to dial back interest rates.

Millennials and Gen Xers have locked in the lowest mortgage rates at roughly 4.0%, a recent Freddie Mac report said.  Thirty-seven percent of millennials locked into their low rates in 2020 and 2021, buying their first home. Gen Xers, on the other hand, were locked into lower rates in that time frame through refinancings.

"Despite the drop this week, mortgage rate trends aren't likely to bust the mortgage rate inventory lock-in effect until at least the end of the year, and possibly well into 2025, as the Fed holds fast on fighting inflation," Realtor.com Senior Economist, Ralph McLaughlin said. "We'll likely need to see a 150-200 bps drop in the 10-year yield to get to a point where sellers feel comfortable selling and buying another home, and at current spreads, this could require 3-4 quarter-point rate cuts by the Fed. 

"As of now, the market is pricing in just 1 cut by the end of the year and 2-3 cuts in 2025," McLaughlin continued. "As such, anyone hoping the lock-in effect will be busted this year may be sorely disappointed."

Homebuyers can find the best mortgage rates by shopping around and comparing options. You can visit an online marketplace like Credible to compare rates and choose your loan term.

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