Homebuyers aren’t buying and homebuilders aren’t building in the face of untamed mortgage rates

‘Unhealthy and unsustainable’: Homebuyers not buying and builders not building in face of untamed mortgage rates

U.S. mortgage rates crept back up this week as demand for home loans fell, according to a pair of widely followed reports.

Buyers and sellers are increasingly on edge as the average 30-year fixed mortgage interest rate – now more than double what it was at the beginning of the year – inches closer to 7%.

Homebuilders are also losing confidence in the housing market amid rising prices, which one industry leader calls “unhealthy and unsustainable.”

“High mortgage rates approaching 7% have significantly dampened demand, especially for first-time and first-generation prospective homebuyers,” Jerry Konter, president of the National Association of Home Builders, said this week.

“Politicians must address this worsening affordable housing crisis.”

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30-year fixed-rate mortgage

The average rate on a 30-year fixed mortgage hit 6.94% this week, up from 6.92% a week earlier, mortgage finance giant Freddie Mac reported Thursday. A year ago at this time, the 30-year rate averaged 3.09%.

Although the latest rate hike was more moderate than in previous weeks, borrowing costs are still at a 20-year high and getting worse.

“The 30-year fixed rate mortgage continues to remain at just 7% and is negatively impacting the housing market in terms of declining demand,” said Sam Khater, Freddie Mac’s chief economist.

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“Furthermore, housebuilder confidence has fallen to half of what it was just six months ago and construction, particularly single-family house construction, continues to slow.”

15-year fixed-rate mortgage

The rate on a 15-year fixed mortgage is averaging 6.23%, up from 6.09% last week, Freddie Mac said. A year ago at this time, the 15-year yield averaged 2.33%.

Since then, buyers have lost significant purchasing power – and many have had to adjust their budgets or put their searches on hold.

Faced with fewer buyers, the sellers can no longer make a breakthrough.

“Among recently sold properties that have been on the market for more than a month, sellers had to drop prices by an average of 12%,” said Nadia Evangelou, senior economist for the National Association of Realtors.

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5-year adjustable rate mortgage

The increasingly popular five-year adjustable-rate mortgage (ARM) averaged 5.71% this week, down from 5.81% a week earlier.

A year ago at this time, these adjustable rate mortgages averaged 2.54%.

This week’s rate drop is likely to fuel even more demand for the five-year ARM, which comes with a fixed rate for the first five years and then adjusts up or down based on a benchmark like the prime rate.

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Buyers have been pouring into adjustable-rate mortgages at a rate not seen since the Great Recession, betting they’ll have an opportunity to refinance to a lower, fixed-rate loan before their ARMs adjust.

Mortgage rates may be at a ‘new normal’

Interest rates have risen steadily this year amid moves by the Federal Reserve to curb decades of high inflation — despite the pain it’s causing consumers.

Today’s rates can be considered “the new normal,” says Evangelou.

She points out that the 7% figures were typical in the mid-to-late 1990s and early 2000s. Nevertheless, home ownership was then higher than it is now.

“Today’s potential buyers also have to deal with higher inflation,” says Evangelou. “While inflation outpaces wage growth, the typical family must stretch their budget and spend more than 25% of their income on their mortgage payment.

“Including other expenses such as mortgage insurance, home insurance, taxes and property maintenance costs, home purchase costs exceed 30% of a typical family’s income.”

Applying for a mortgage this week

Mortgage applications fell 4.5% week-on-week, according to the latest report from the Mortgage Bankers Association (MBA).

“The speed and level to which interest rates have climbed this year has sharply reduced refinancing activity and exacerbated existing affordability challenges in the purchase market,” said Joel Kan, MBA executive vice president and deputy chief economist.

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“Residential activity, everything from housing starts to home sales, has been on a downward trend that coincides with the rise in interest rates.”

Applications to refinance existing loans were down 7% from a week earlier and were 86% lower than last year. The refi share of mortgage activity fell to 28.3%, down from 29% the previous week.

Applications for mortgages to buy homes fell 4% this week – and were 38% lower than the same week a year ago.

“With prices at these high levels, the ARM share rose to 12.8% of all filings, which was the highest share since March 2008,” Kan said.

“ARM mortgages continue to remain a viable option for borrowers still trying to find ways to lower their monthly payments.”

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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