Homebuyers are having a 'come to Jesus' moment as mortgage rates now top 7% - here's when things should pick up

Homebuyers are having a ‘come to Jesus’ moment as mortgage rates now top 7% – here’s when things should pick up

The rate on America’s most popular home loan rose above 7% for the first time in 20 years as the housing market faces a potentially long downturn.

Rapidly rising mortgage rates have weighed on home buying, and forecasts show continued weakness through 2023.

Home sales and new listings have hit record highs since the early days of the pandemic, and more than 20% of sellers lowered their asking price in September, according to real estate firm Redfin.

“People have come to Jesus about the housing market,” Redfin CEO Glenn Kelman said in an interview on CNBC this week.

“So people who are still in the market before Thanksgiving are eager to sell, but most people just pull their listings.”

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30 Year Fixed Rate Mortgages

A 30-year fixed-rate mortgage averaged 7.08% this week, down from 6.94% last week, mortgage finance giant Freddie Mac reported Thursday.

Last year at this time, the 30-year rate averaged 3.14%.

With rates above 7%, many home buyers are settling in for a long wait as higher borrowing costs have pushed them out of the market altogether.

“Homebuyer affordability took a huge hit in September,” said Edward Seiler, associate vice president of housing economics for the Mortgage Brokers Association (MBA).

“With mortgage rates continuing to rise, the purchasing power of borrowers is diminishing,” he said. “The median loan amount in September was $305,550, well below the February peak of $340,000.”

Those who buy face much higher monthly payments. The national median mortgage payment has increased by $558 – or 40.4% – since the start of 2022, according to an MBA index that measures the change in monthly mortgage payments, relative to income, over time.

15-year fixed rate mortgages

The average rate for a 15-year fixed-rate mortgage was 6.36% this week, down from 6.23% last week, according to Freddie Mac.

A year ago, the 15-year mortgage averaged 2.37%.

Part of the reason mortgage rates have risen so much — and so quickly — is the Federal Reserve’s unwavering hike in its key interest rate — an effort to slow the economy and lower inflation.

Although the Fed does not set mortgage rates directly, changes to its federal funds rate ultimately influence what consumers pay to borrow money for a variety of items, including cars and houses.

5 Year Adjustable Rate Mortgage

The typical rate for a five-year variable rate mortgage, or ARM, was 5.96% this week, up from last week when it averaged 5.71%.

Last year at this time, the five-year ARM averaged 2.56%.

ARMs begin with a period of fixed interest rates – usually between three and 10 years. Rates are generally lower than fixed-rate loans, such as the most popular 30-year mortgage.

After the initial term, the rate of an ARM will adjust up or down based on a benchmark like the prime rate.

What’s going on with house prices

While home prices are slowing in some areas, they remain relatively high in most markets. Combined with higher borrowing costs, buying a home is no longer possible for many Americans.

“Many potential buyers are choosing to wait and see where the housing market ends up, pushing demand and house prices even lower,” said Sam Khater, chief economist at Freddie Mac.

The August Case-Shiller home price index marked the fifth consecutive month of slower annual home price appreciation. The index posted a gain of 13%, compared to 15.6% in July.

According to CoreLogic’s House Price Index forecast, annual growth will slow to 9% by December and drop to less than 1% by the end of March 2023.

High mortgage rates are having a big impact on affordability in West Coast and Mountain West markets, CoreLogic says.

Mortgage applications continue to decline

An index measuring the volume of mortgage applications fell another 1.7% last week from the previous week, according to the MBA’s weekly survey.

Specifically, mortgage applications for home purchases fell 2% at the slowest pace since 2015, while refinance applications remained essentially flat. Compared to last year, real estate purchase loans fell by 42% and refis fell by 86%.

“The continued upward trend in mortgage rates continues to depress mortgage application activity, which remained at its slowest pace since 1997,” said Joel Kan, vice president and deputy chief economist at MBA. .

The average rate for a 30-year fixed mortgage is expected to peak in the last quarter of this year and then start falling in 2023, according to the MBA’s latest forecast.

“MBA forecasts expect weak economy and housing market in 2023 to cause purchases to decline 3%, while refinancing volume is expected to decline 24%,” Kan said.