Mortgage Rates Approach 7%

Mortgage rates have taken a steep climb in recent weeks, surging closer to 7% and forcing more would-be buyers back to the sidelines. The rate on the average 30-year fixed mortgage increased to 6.50% from 6.32% the week prior, according to Freddie Mac. Rates have increased 41 basis points this month, after government data showed inflation had risen slightly last month, reversing most of the decline witnessed since mid-November. This sharp uptick in rates has squeezed homebuyer demand, driving inflation-weary homebuyers to lower their budgets or abandon their purchasing plans. Meanwhile, the handful of buyers still in the market are negotiating sales before rates further erode their buying power. “Still-high home prices and elevated rates have crushed affordability,” Keith Gumbinger, vice president of HSH.com said. “That said, there is reasonable demand and ability by potential homebuyers to engage in the market, but there are still too few homes for sale from which to hope to find something suitable at a price a prospective buyer can actually afford. All combined, these things are dampening the market. As mortgage rates climb higher, a growing share of homebuyers have decided to walk away from their purchase plans. The volume of mortgage applications for a purchase fell 18% compared with the previous week, the Mortgage Bankers Association (MBA) survey of applications for the week ending Feb. 17 found. Overall, purchase application volume was down 41% from a year ago, with the purchase index at its lowest point since 1995. “This time of the year is typically when purchase activity ramps up, but over the past two weeks, rates have increased significantly,” Joel Kan, MBA’s vice president and deputy chief economist said in a statement. “The increase in mortgage rates has put many homebuyers back on the sidelines once again, especially first-time homebuyers who are most sensitive to affordability challenges and the impact of higher rates.” The pullback in demand doesn’t come as a surprise. According to Jeff Reynolds, broker at Compass and founder of UrbanCondoSpaces.com, homebuyers have lost roughly 10% of their purchasing power in the last two weeks alone due to the sharp uptick in rates. “That creates a lot of rate shock for buyers,” Reynolds said. Softer home prices aren’t much help for some price-struck buyers, either. According to Realtor.com, home prices have decreased 11% over the past 7 months to an average of $400,000 in January. Still, at last week’s rate of 6.32%, the buyer of a median-priced home was looking at a $1,985 monthly mortgage payment – that’s 42% higher than last year, though 6% lower than it would have been in June 2022. “It was inevitable that demand would slow,” Reynolds said. “We had our worst seasonally adjusted mortgage purchase application reading in recent history. We’ll find out in the next 30 days if buyers are getting used to higher rates or if they will stay on the sidelines waiting for rates to come back to earth.” As the real estate market struggles to adapt to these new rates, some experts have voiced concerns that the higher mortgage rates may negatively impact the broader economy. A slowdown in the housing market could have ripple effects throughout the economy, impacting jobs and consumer spending. For now, it remains to be seen how long mortgage rates will continue to climb and how much of an impact they will have on the housing market. Homebuyers who are able to secure a mortgage now may face higher monthly payments, but they may also be able to take advantage of softer home prices and lower competition from other buyers who are sitting on the sidelines.