Mortgage rates in the United States surged to a 23-year high this week, dealing yet another blow to the housing market. The average 30-year fixed mortgage rate climbed to 7.31%, up from 7.19% just a week prior, according to data released by Freddie Mac. This alarming surge in mortgage rates is the highest rate seen since mid-December 2000 when it averaged 7.42%.
The abrupt rise in mortgage rates closely followed the trajectory of the 10-year Treasury yield, which reached its highest point since 2007, raising concerns over a looming U.S. government shutdown. This development came on the heels of the Federal Reserve’s announcement the previous week, suggesting its intention to maintain higher benchmark interest rates for an extended period.
For prospective homebuyers, this uptick in rates has further eroded their purchasing power, providing compelling reasons to stay on the sidelines. Meanwhile, those still in the hunt for homes may face even steeper rates in the near future.
Jason Sharon, owner of Home Loans Inc., commented on the situation, stating, “Are higher rates causing a significant impact on buyers? The answer is yes. Will it kill the housing market? Absolutely not. However, it is pumping hard on the brakes.”
The surge in mortgage rates has had a significant impact on purchasing demand. According to the Mortgage Bankers Association (MBA) survey for the week ending September 22, the volume of purchase applications for mortgages declined by 2% on a seasonally adjusted basis compared to the previous week. Overall, purchase demand plummeted by 27% when compared to the same week in the previous year.
Beatrice de Jong, a real estate broker at The Beverly Hills Estates, remarked on the current situation, saying, “Presently, there are fewer buyers actively searching for homes, leading to reduced competition.”
Interestingly, the increase in inventory is an unusual occurrence for this time of the year. Mike Simonsen, CEO of Altos Research, noted in his weekly analysis that inventory is growing because many buyers have exited the market. However, new listings remain lower, with “still running 9-10% fewer homes for sale each week than last year.”
The reluctance of homeowners to sell their properties, driven by their desire to maintain their current, lower mortgage rates, is a significant factor contributing to the supply-demand dynamic. Orphe Divounguy, senior economist at Zillow, pointed out that “Eighty percent of homeowners with a mortgage have a mortgage rate below 5%. These homeowners have little incentive to sell, trading in their low monthly housing costs for the much higher housing costs that they would face as a buyer in today’s mortgage rate environment.”
The supply-demand balance is reflected in the latest sales data, which shows a faltering housing market. New home sales declined in August, pending home sales (an indicator of future closed sales) slumped, and closed sales of previously owned homes reached a seven-month low.
Despite the challenges, the inventory scenario is helping to support home prices. The median price of a resale home sold in August reached $407,100, marking the highest price for August and the fourth highest ever recorded, according to the National Association of Realtors. Overall, home prices achieved a new record in July after six consecutive months of growth.
However, experts warn that the market could undergo significant changes if rates continue their upward trajectory. A housing economist recently cautioned that mortgage rates could reach as high as 8%, especially following Federal Reserve Chair Jerome Powell’s indication that a high-rate environment is likely here to stay.
Homebuilders, who had seen increased sales as buyers fled the challenging resale market, are now stepping up incentives to attract buyers. In September, 32% of builders reduced their home prices, a notable increase from 25% in the previous month, as reported by NAHB. This represents the largest share of builders slashing prices since December 2022 (35%).
A separate survey conducted by Altos Research revealed that 37% of the market has implemented price reductions for the week ending September 25, surpassing figures from recent years, except for the previous year at the same time.
Mike Simonsen of Altos Research highlighted, “A normal balanced market will have price reductions around 30-35% of homes for sale with price cuts. As it approaches 40%, that’s a clear indicator that buyers are making fewer offers.”
As the housing market navigates the challenges posed by the surge in mortgage rates, industry stakeholders and prospective homeowners alike are closely monitoring developments in the coming months.
Source: Yahoo Finance
