The average interest rate on America’s most popular home loan hit a 14-year high this week, pricing out more potential buyers amid high home prices and rising borrowing costs.
“The monthly payment that people have to come up with to buy that house is just unaffordable,” Mark Zandi, chief economist at Moody’s Analytics, said on the Plain English podcast.
“A lot of potential first-time home buyers are now locked out of the housing market.”
And with this month’s surprisingly high inflation reading, borrowing costs could rise even higher as the Federal Reserve plans to hike higher.
30 year fixed rate mortgages
The average rate on a 30-year fixed mortgage hit 6.02% this week, up from 5.89% a week earlier and more than double what it was a year ago, mortgage finance giant Freddie Mac reported Thursday.
“Mortgage rates continued to rise alongside warmer-than-expected inflation numbers this week, surpassing 6% for the first time since late 2008,” says Sam Khater, Freddie Mac’s chief economist.
“While the increase in rates will continue to moderate demand and put downward pressure on home prices, inventory remains insufficient. This suggests that although house price declines are likely to continue, they should not be large.”
15 year fixed rate mortgages
The interest rate on a 15-year fixed rate mortgage was 5.21% this week, up from 5.16% last week, Freddie Mac reports.
A year ago at this time, the 15-year average rate was 2.12%.
The higher rates are affecting home sales, and sellers are having to cut their prices. That is giving some buyers an upper hand in negotiations, but not always enough.
“Unfortunately, the affordability pressures of rising mortgage rates and a shortage of homes listed for sale are making it increasingly difficult for buyers to use their newfound leverage,” says Taylor Marr, vice chief economist with Redfin, in a market update.
“Today’s average buyer is paying less than list price, but they continue to struggle to find a home that meets their criteria and budget.”
5 year adjustable rate mortgage
The average rate on a five-year adjustable-rate mortgage (ARM) jumped to 4.93%, up from last week when it averaged 4.64%.
A year ago at this time, the average 5-year ARM was 2.51%.
ARMs start out with lower rates than longer-term loans, but after their initial terms, they adjust each year — up or down — in lockstep with the prime rate or other benchmark.
Borrowers can refinance at a lower rate once the initial term ends, but only if rates go down. They could easily go higher depending on the health of the economy.
Other earnings on mortgage applications
Last week, mortgage applications fell by 1.2% from the previous week, according to the latest survey from the Mortgage Bankers Association (MBA).
The decrease was driven by applications to refinance existing loans, which fell 4% from the previous week and were 83% lower than the same week last year.
Applications for mortgages to buy homes rose, but by just 0.2%.
“Higher mortgage rates have pushed refinance activity down more than 80% from last year and have contributed to more homebuyers staying on the sidelines,” said Joel Kan, MBA associate vice president of economic forecasting and industry, this week.
Rates that fall into the ‘red zone’
Phoenix real estate agent Joe Bourland says affordability went by the wayside when mortgage rates started to turn up earlier this year — and the market is feeling it.
“As soon as those rates started getting into the 5s, the market turned on a dime,” he says. “It was very dramatic.”
A buyer buying a median-priced home is now paying a monthly mortgage of $2,100, up 66% from last year, according to Realtor.com. And new listings have fallen for 10 straight weeks.
“We’re entering a red zone on mortgage rates, because consumers are likely to stay out of the market if rates push up toward 7%,” says Corey Burr, senior vice president at TTR Sotheby’s International Realty in Washington, DC
“This level is significantly higher than the rates seen just nine months ago, and the expensive transportation costs are a real deterrent for most potential buyers.”
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