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‘Frigid’ future ahead for housing market as mortgage rates scale new heights

·4 min read
‘Frigid’ future ahead for housing market as mortgage rates scale new heights
‘Frigid’ future ahead for housing market as mortgage rates scale new heights

The interest rate on America’s most popular home loan surged this week, surpassing its mid-summer high as federal regulators continue to wrestle with high inflation.

The rate on a 30-year fixed mortgage — up for the third straight week — is now ever so close to the 6% mark, a level consumers have not seen in more than a decade.

Borrowing costs could easily continue their upward momentum, with the Federal Reserve planning more hikes to its trend-setting interest rate as it attempts to cool the economy and bring down high prices.

“It is very much our view, and my view, that we need to act now forthrightly, strongly and as we have been doing, and we need to keep at it until the job is done,” Fed Chair Jerome Powell said this week at the annual Cato Institute Monetary Conference.

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30-year fixed-rate mortgages

The 30-year fixed mortgage rate averaged 5.89% this week, up from 5.66% last week and 2.88% one year ago, housing finance giant Freddie Mac reported on Thursday.

“Mortgage rates rose again as markets continue to manage the prospect of more aggressive monetary policy due to elevated inflation,” says Sam Khater, Freddie Mac’s chief economist.

Higher borrowing costs are depressing the housing market, as many would-be buyers can no longer afford to finance a home purchase with rates more than double what they were this time last year.

This week’s higher rate, however, is just an average. Borrowers who shop around can and do find lower rates.

“Our research indicates that borrowers could save an average of $1,500 over the life of a loan by getting one additional rate quote and an average of about $3,000 if they get five quotes,” Khater says.

15-year fixed-rate mortgages

The interest rate on a 15-year fixed-rate mortgage averaged 5.16% this week, up from 4.98% last week, Freddie Mac reports.

Last year at this time, the 15-year rate was averaging 2.19%.

Although housing activity typically tends to slow this time of year as kids go back to school and families get in one last summer road trip, the surge in mortgage rates weighed even more on the market over the Labor Day weekend, said Daryl Fairweather, chief economist at Redfin.

Fewer shoppers toured homes over the long weekend — and the share of sellers dropping their prices was near a record high, according to Redfin. New listings fell 18% year-over-year as rates spiked.

“I expect fall and winter to be especially frigid as sales dry up more than usual,” Fairweather said.

5-year adjustable-rate mortgages

The average rate on a five-year adjustable-rate mortgage (ARM) rose to 4.64%, up from last week when it averaged 4.51%.

A year ago at this time, the 5-year ARM was averaging 2.42%.

ARMs start with lower rates than longer-term loans, but after their initial terms, they adjust each year — up or down — in lockstep with the prime rate or another benchmark.

If longer-term rates were to fall after the initial period of an ARM, a borrower could potentially refinance into a lower rate. But there’s no guarantee rates will go down. They could easily be higher depending on the state of the economy.

Mortgage applications this week

Demand for mortgages has been on a downward slide as the cost of borrowing grows.

Mortgage applications fell 0.8% last week, according to the latest data from the Mortgage Bankers Association (MBA).

The number of applications to refinance existing loans fell 1% from a week ago — and compared with last year, refis are down a shocking 83%.

Applications to purchase homes were also down by 1% last week and 23% from the same week one year ago.

“There is no sign of a rebound in purchase applications yet, but the robust job market and an increase in housing inventories should lead to an eventual increase in purchase activity,” Mike Fratantoni, the MBA’s chief economist, said this week.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.