By Anna Bahney | CNN

Mortgage rates fell this week as economic data showed inflation is fading.

The 30-year fixed-rate mortgage averaged 6.15% in the week ending January 19, down from 6.33% the week before, according to Freddie Mac. A year ago, the 30-year fixed rate was 3.56%.

“As inflation continues to moderate, mortgage rates declined again this week,” said Sam Khater, Freddie Mac’s chief economist.

“Rates are at their lowest level since September of last year, boosting both homebuyer demand and home builder sentiment. Declining rates are providing a much-needed boost to the housing market, but the supply of homes remains a persistent concern,” he added.

Mortgage rates rose throughout most of 2022, spurred by the Federal Reserve’s unprecedented campaign of harsh interest rate hikes to tame soaring inflation. But mortgage rates dropped in November and December, following data that showed inflation may have finally reached its peak.

Last week the Consumer Price Index for December showed that overall prices declined last month by 0.1%. This data signaled to investors that the Federal Reserve’s rate increasing will taper if inflation continues to slow. Mortgage rates are expected to remain volatile until the Fed’s rate hikes end.

The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit. Many buyers who put down less money upfront or have less-than-perfect credit will pay more than the average rate.

Inflation picture improves

The average rate for a fixed-rate mortgage dropped following the 10-year Treasury, which fell from 3.75% at the beginning of the month to 3.37% this week.

The Fed does not set the interest rates borrowers pay on mortgages directly. But its actions influence them. Mortgage rates tend to track the yield on 10-year US Treasury bonds, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does and investors’ reactions.

When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.

“Although the slower inflation rate in December is a positive sign, concerns from businesses and investors about economic growth continue to rise as weaker retail sales data remind us that the US consumer is not invincible,” said Jiayi Xu, Realtor.com economist.

The labor market is one sector of the economy that has remained relatively strong — despite some high-profile layoffs in the tech sector.

“Through December, nationwide unemployment remained at long-term lows, as business and investors continued to watch for the end to the Fed’s rate hiking in order for confidence to return to the market,” Xu said.

Home buyers face fluctuating rates

Sales of homes in the United States have dropped significantly during the past year with the rise in interest rates, and rates are expected to remain volatile in the first part of the year.

“While our 2023 forecast anticipates ongoing inflation causing upward pressure on rates, recent favorable data has helped to pull mortgage rates down,” said Xu. “As the economy weathers the easing in inflation, mortgage rates may continue to fluctuate in the short term, within the 6% to 7% range that we have seen over the past five months.”

Recent lower mortgage rates have improved home buyers’ sentiment slightly and applications have increased, jumping 28% last week, according to the Mortgage Bankers Association.

“Mortgage rates are now almost a full percentage point lower than the peak reported last October, which is good news for households looking to buy a home,” said Bob Broeksmit, MBA president and CEO.

Still, with rates nearly double what they were a year ago, it’s still challenging for many would-be buyers to afford a home. This is exacerbated by homeowners who are reluctant to sell and part with the ultra-low mortgage rate they secured over the past few years.

“For people who are thinking about selling their home, current market conditions may be causing them to hold off,” said Xu. “Recent data show that December home sellers faced more competition from other potential sellers, longer time on market, and a greater likelihood of having to lower their asking price. Some are waiting to see if the market improves before putting their home up for sale.”