Mortgage rates have surged once again, reaching a 23-year high and stirring concerns that they may soon breach the ominous 8% mark. According to Freddie Mac, the average 30-year fixed mortgage rate has risen to 7.49%, up from 7.31% in the previous week. This increase follows the spike in the yield of the 10-year Treasury, which reached a 16-year high this week. For the second consecutive week, rates are at their highest point since December 2000, with little indication of a softening trend.
The relentless ascent of mortgage rates is causing significant headwinds for potential homebuyers, particularly those who are price-conscious. Consequently, demand for home purchases is experiencing its most dismal week in nearly three decades, compelling many prospective buyers to stay on the sidelines. In contrast, those still in the hunt for homes are gravitating towards lower-rate options, eager to secure their mortgages before rates potentially surge even higher.
At the beginning of the year, experts widely anticipated that mortgage rates would decline to around 6% by the end of 2023. However, the current question looming is whether rates will breach the 8% threshold this year. Lisa Sturtevant, Chief Economist at Bright MLS, a real estate data provider, remarked, “The gap between the yield on the 10-year Treasury and the rate on a 30-year fixed-rate mortgage has been around 3 percentage points, so as the Treasury yield approaches 5%, an 8% mortgage rate does not seem unlikely.”
As mortgage rates continue their relentless climb to a 23-year high, demand for mortgage applications to purchase homes has dwindled. The Mortgage Bankers Association (MBA) reported a 6% drop in demand for mortgage applications last week, marking the lowest point since 1996. Overall, purchase demand was 22% lower compared to the same week in the previous year.
Joel Kan, MBA’s Chief Economist, expressed the impact of the rapid rate hikes, stating, “Mortgage applications ground to a halt. The rapid rise in rates pushed an increasing number of potential homebuyers out of the market.”
The only loans witnessing any significant activity are lower-rate alternatives. The share of applications for Federal Housing Administration (FHA) loans increased to 14.5%, up from 14.1% the previous week. The MBA found that the average interest rate for a 30-year fixed FHA loan was 7.29% last week, nearly a quarter-point lower than the 7.53% rate reported for conforming loans.
Additionally, adjustable-rate mortgages (ARMs) have gained popularity, offering some respite from the higher rates. The MBA noted that the average contract rate for a five-year ARM was 6.49% for the week ending September 29, a notably better rate compared to the typical 30-year fixed conventional loan.
“Adjustable-rate mortgages are becoming more popular,” noted Sturtevant. “With an ARM, homebuyers are able to secure a rate that is a percentage point lower than a fixed-rate mortgage, with the expectation that they will be able to refinance in a couple of years.”
As prospective buyers retreat due to soaring rates, the inventory of single-family homes for sale is on the rise. Altos Research reported a 1.3% increase in available inventory for the week ending October 2, forecasting that the volume of unsold homes on the market could continue to climb throughout October.
“It’s common now to hear 8% mortgage rates being quoted to potential homebuyers. For many in the market, it’s increasingly tempting to take a ‘wait and see’ approach,” stated Altos Research CEO Mike Simonsen in his weekly housing analysis. “Fewer offers are being made, and inventory is building.”
Despite the growing inventory of homes, homeowners are generally reluctant to sell. Nationwide, only 68,000 single-family homes were newly listed for sale during the week ending October 2, marking a 25% decline compared to the same period last year.
The scarcity of new inventory on the market has so far kept prices elevated, making any further increase in mortgage rates even more burdensome. Should rates reach the 8% threshold, the outlook for homebuying activity appears grim.
“The housing market will face a significant downturn this fall if rates hit 8%. Prices won’t plummet dramatically, given the relatively low inventory, but transactions could plummet to levels not seen since 2010,” cautioned Sturtevant. “The housing market will become a ‘market of necessity,’ with only buyers and sellers who are compelled to move due to changes in family, job, or financial circumstances remaining active.”
With mortgage rates reaching a 23-year high, the future of the housing market remains uncertain, leaving potential homebuyers and sellers to navigate a challenging landscape.
Source: Yahoo Finance
