America’s most popular home loan got more expensive again this week, striking yet another blow to haggard home shoppers staring at the steepest borrowing costs in 20 years.
The average 30-year fixed mortgage rate — now flirting with the 7% mark — is more than double what it was at the beginning of the year.
Even as the surge in home prices continues to slow down, dramatically higher financing costs are pushing buyers onto the sidelines — or out of the market entirely.
“The numbers just don’t work for them anymore,” says Lisa Sturtevant, an economist with Bright MLS in the mid-Atlantic region.
“That 7% line is also something of a mental hurdle for buyers, even those who still qualify,” she says. “They may be waiting to see if rates are going to come down.”
Yet while many would-be buyers have stopped looking, others have found sort of a workaround to the higher rates.
30-year fixed-rate mortgages
The average rate on a 30-year mortgage jumped to 6.92% this week, up from 6.66% a week earlier, mortgage giant Freddie Mac reported on Thursday. Last year at this time, the rate averaged 3.05%.
The 30-year rate hasn’t been this high since April of 2002.
“We continue to see a tale of two economies in the data: Strong job and wage growth are keeping consumers’ balance sheets positive, while lingering inflation, recession fears and housing affordability are driving housing demand down precipitously,” says Sam Khater, Freddie Mac’s chief economist.
“The next several months will undoubtedly be important for the economy and the housing market.”
15-year fixed-rate mortgages
The typical rate on a 15-year mortgage was 6.09% this week, up from 5.90% last week, Freddie Mac says.
A year ago at this time, the 15-year rate averaged 2.30%.
Buyers today are facing a different reality from just a few months ago when many were forced to offer well above asking price and waive contingencies to score a home.
With rates making homes less affordable, sales have plummeted. In August, sales fell for the seventh straight month and were down 20% from a year earlier, according to the National Association of Realtors’ latest data.
5-year adjustable-rate mortgage
The rate on a five-year adjustable-rate mortgage (ARM) averaged 5.81% this week, up from 5.36% last week.
Last year at this time, the five-year ARM averaged 2.55%.
ARMs start out with a period of fixed interest rates — typically between three and 10 years. The rates are typically lower than they are on a fixed-rate loan, like the more popular 30-year mortgage.
But once the initial term ends, the rate on an ARM adjusts — up or down — based on a benchmark like the prime rate.
The case for even higher mortgage rates
The Federal Reserve has hiked its trend-setting interest rate five times this year in order to slow the economy, but the uncomfortably rapid rise in consumer prices still isn’t letting up.
That means more rate hikes are coming — and while mortgage rates don’t directly correspond to changes in the Fed’s rate, they are influenced by them.
At the Fed’s last meeting, officials said the only way to combat inflation was to stay on an aggressive course of restrictive monetary policies.
“Many participants emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action,” according to the newly released minutes from the meeting.
A lower-rate alternative
Some buyers are trying to sidestep today’s higher borrowing costs by locking in their mortgage rate for a shorter amount of time.
“The popularity of adjustable-rate mortgages is increasing very quickly, as many borrowers believe they will have the opportunity to refinance into a fixed-rate mortgage at some point before their ARM adjusts,” says Corey Burr, a real estate agent in the Washington D.C. area.
He says borrowers considering this route should look at adjustable-rate loans with initial terms of seven or 10 years.
“That will increase the chances that an opportunity for a refinance will take place,” Burr says.
Mortgage applications this week
Mortgage activity has fallen again amid the rising rates, according to a weekly survey from the Mortgage Bankers Association.
Applications for refinances and purchases both fell by 2% compared to the previous week.
Refis are down 86% from last year, while purchase loan applications are off by 39%.
Mike Fratantoni, MBA’s chief economist, said the ARM share of applications also remained “quite high” at 11.7%.
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