Adds quotes from lender and economist in paragraphs 6-9

By Lucia Mutikani and Saeed Azhar

WASHINGTON, Feb 26 (Reuters) - The average rate on the popular U.S. 30-year fixed-rate mortgage fell below 6% this week for the first time in 3-1/2 years, but the decline is likely temporary and on its own insufficient to significantly boost housing demand unless supply increases, said economists.

The 30-year fixed mortgage rate averaged 5.98%, the lowest level since September 2022, down from 6.01% last week, mortgage finance company Freddie Mac said on Thursday. It averaged 6.76% during the same period a year ago.

The housing market has become a hot-button political issue as President Donald Trump, under pressure to address cost-of-living concerns ahead of November midterm congressional elections, has floated a number of proposals to make homebuying more affordable.

The drop followed a decline in the benchmark 10-year U.S. Treasury yield after the U.S. Supreme Court on Friday struck down Trump's sweeping tariffs. In response, Trump imposed a 10% global tariff, before raising the rate to 15%. The 30-year fixed-rate mortgage tracks the 10-year Treasury yield.

"As this week's decline stems from market volatility rather than fundamental economic data, more supportive economic data is needed to establish a consistent trend," said Jiayi Xu, an economist at Realtor.com, while others noted a lack of housing inventory would continue to be a challenge for buyers.

Economists and policymakers say a dearth of properties for sale, especially starter homes, continues to weigh on the housing market. Many homeowners hold mortgages with rates below 5%, creating what has been called a rate-lock. The inventory of previously owned houses is also well below its pre-pandemic level.

Still, some bankers and market-watchers said the 30-year mortgage rate falling below 6% was an important psychological threshold that could draw some sellers to list their homes, and give potential homebuyers more confidence to jump into the market at a time when seasonally the market typically heats up. Mortgage refinancing has risen as the 30-year rate has fallen.

"That headline alone could prompt many sidelined buyers to take another peek at the housing market," said Kara Ng, senior economist at Zillow.

Matt Vernon, head of consumer lending at Bank of America, said he would expect any movement in the market to happen gradually.

"In many cases, life events drive decisions more than rates alone, but lower rates could be the nudge some buyers and current homeowners have been waiting for," said Vernon, adding mortgage application volumes at Bank of America are up nearly 22% year over year.

RATE-LOCK LIMITS HOME AVAILABILITY

House prices increased 1.8% in the 12 months through December after climbing 2.1% in November, the Federal Housing Finance Agency, which oversees mortgage finance giants Freddie Mac and Fannie Mae, said on Tuesday.

Trump last month ordered that agency to purchase $200 billion in mortgage bonds to help lower the cost of home loans.

Economists are skeptical that those mortgage purchases will significantly improve housing affordability.

Minutes of the Federal Reserve's January 27-28 policy meeting published last week, describing a briefing by a New York Fed official, noted that the administration's bond-buying plans had caused "a notable decline in mortgage-backed securities yields." However, that is unlikely to materially boost mortgage refinancing "because current mortgage rates are well above the weighted average rate of outstanding mortgages," the minutes noted.

(Reporting by Lucia Mutikani, additional reporting by Michael S. Derby and Saeed Azhar; Editing by Chizu Nomiyama, Mark Porter and Lisa Shumaker)

((Lucia.Mutikani@thomsonreuters.com))