America’s favorite home loan rose in price again this week, dealing another blow to emaciated home buyers staring at their highest borrowing costs in 20 years.
The average interest rate on 30-year fixed-rate mortgages – now flirting with the 7 percent mark – is more than double what it was at the start of the year.
Even as house price increases continue to slow, dramatically higher financing costs are pushing buyers to the sidelines — or out of the market altogether.
“The numbers just don’t work for them anymore,” says Lisa Sturtevant, economist at Bright MLS in the mid-Atlantic region.
“That 7 percent limit is also kind of a mental hurdle for buyers, even those who are still qualifying,” she says. “Maybe they wait and see if interest rates go down.”
But while many potential buyers have stopped looking, others have found a workaround of sorts for the higher prices.
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30-year fixed-rate mortgages
The average interest rate on a 30-year mortgage rose to 6.92% this week, up from 6.66% a week earlier, mortgage giant Freddie Mac reported on Thursday. Last year, the average rate at this point was 3.05%.
The 30-year rate has not been this high since April 2002.
“We continue to see a tale of two economies in the data: strong job and wage growth is keeping consumer balance sheets positive, while persistent inflation, recession fears and housing affordability are driving housing demand precipitously lower,” says Sam Khater , Freddie Mac’s Chief Economist.
“The next few months will undoubtedly be important for the economy and the housing market.”
15-year fixed-rate mortgages
The typical interest rate on a 15-year mortgage was 6.09% this week, up from 5.90% last week, says Freddie Mac.
A year ago at this point, the 15-year rate averaged 2.30%.
Buyers today face a different reality than just a few months ago, when many were forced to bid well above asking price and forego contingencies in order to get a home.
As prices make homes less affordable, sales have plummeted. Sales in August fell for the seventh straight month, down 20% year over year, according to the latest data from the National Association of Realtors.
5-year variable rate mortgage
The interest rate on a five-year adjustable rate mortgage (ARM) averaged 5.81% this week, up from 5.36% last week.
At this point last year, the five-year ARM averaged 2.55%.
ARMs begin with a period of fixed interest rates – typically between three and 10 years. Interest rates are typically lower than a fixed rate loan, such as the more popular 30-year mortgage.
But once the initial term ends, an ARM’s interest rate adjusts — up or down — based on a benchmark like the federal funds rate.
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The case for even higher mortgage rates
The Federal Reserve has hiked its benchmark interest rate five times this year to slow the economy, but uncomfortably fast consumer price inflation is still not abating.
That means more rate hikes are coming — and while mortgage rates don’t directly reflect changes in the Fed rate, they are affected by them.
At the Fed’s last meeting, officials said the only way to fight inflation is to remain on an aggressive monetary tightening stance.
“Many participants stressed that the cost of doing too little to lower inflation is likely to outweigh the cost of doing too much,” read the newly released minutes of the meeting.
A cheaper alternative
Some buyers are trying to circumvent today’s higher borrowing costs by locking in their mortgage rates for a shorter period of time.
“The popularity of adjustable rate mortgages is growing very quickly as many borrowers believe they will eventually have the opportunity to refinance into a fixed rate mortgage before their ARM adjusts,” says Corey Burr, a real estate agent in California Washington DC area.
He says borrowers considering this route should consider variable-rate loans with initial terms of seven or 10 years.
“That will increase the chances that a refinancing opportunity will arise,” says Burr.
Mortgage applications this week
Mortgage activity has slowed again amid rising interest rates, according to a weekly survey by the Mortgage Bankers Association.
Requests for refinancing and purchases were each down 2% from the previous week.
Refis are down 86% year-on-year, while applications for purchase loans are down 39%.
Mike Fratantoni, MBA’s chief economist, said the ARM share of applications also remained “pretty high” at 11.7%.
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