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Housing expert: 8% mortgage rate 'does not seem unlikely' after rates remain at 23-year high

Mortgage rates jumped again this week — remaining at a 23-year high and increasing the likelihood that rates could soon hit 8%.

The rate on the average 30-year fixed mortgage increased to 7.49% from 7.31% the previous week, according to Freddie Mac, following the yield of the 10-year Treasury, which spiked to a 16-year high this week. Rates are at their highest point since December 2000 for a second week in a row, with few signs of softening.

Steeper rates continue to smother homebuyer demand, forcing the price-conscious to the sidelines. Meanwhile, those still on the hunt leaned on lower-rate options, eager to lock in before rates surge higher.

"At the beginning of the year, it was widely expected that mortgage rates would fall to around 6% by the end of 2023. However, now the question is whether rates will hit 8% this year," Lisa Sturtevant, chief economist at Bright MLS, a real estate data provider, said in an emailed statement. "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."

Read more: Mortgage rates at 20-year high: Is 2023 a good time to buy a house?

Homebuyer demand sinks to worst point since 1996

As rates surged to a 23-year high, demand for home purchases experienced its worst week in nearly three decades.

Demand for mortgage applications to purchase a home fell 6% last week to its lowest point since 1996, according to the Mortgage Bankers Association (MBA) survey for the week ending Sept. 29. Overall, purchase demand was 22% lower than the same week a year ago.

"Mortgage applications ground to a halt," Joel Kan, MBA’s chief economist, said in a press statement. "The rapid rise in rates pushed an increasing number of potential homebuyers out of the market."

Read more: First-time homebuyer in 2023: What you need to know

Realtor Steve Bremis (L) talks to house hunters Makayla Gavitt (C) and David Harris during an open house at a condominium unit in Somerville, Massachusetts. (Credit: Brian Snyder, REUTERS)
Realtor Steve Bremis (left) talks to potential homebuyers Makayla Gavitt and David Harris during an open house at a condominium unit in Somerville, Mass. (Credit: Brian Snyder/REUTERS) (Brian Snyder / Reuters)

The only loans seeing any activity were lower-rate alternatives.

For instance, the share of applications for Federal Housing Administration (FHA) loans increased to 14.5% from 14.1% the week prior. The average interest rate for a 30-year fixed FHA loan was 7.29% last week, the MBA found, or nearly a quarter-point lower than the 7.53% rate the MBA had for conforming loans.

Adjustable-rate mortgages (ARMs) also registered an increase, the MBA noted, another sign that folks were looking to get some relief from higher rates. The average contract rate for a five-year ARM was 6.49% for the week ending Sept. 29, far better than the typical 30-year fixed conventional loan.

"Adjustable-rate mortgages are becoming more popular," Sturtevant said. "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."

‘A market of necessity’

Prospective home buyers leave a property for sale during an Open House in a neighborhood in Clarksburg, Maryland on September 3, 2023. Homeownership feels increasingly out of reach for younger generations of Americans, who are squeezed by student debt and childcare costs in an era of slower economic growth. (Credit: Roberto Schmidt, AFP via Getty Images)
Prospective homebuyers leave a property for sale during an open house in a neighborhood in Clarksburg, Md., on Sept. 3. (Credit: Roberto Schmidt/AFP via Getty Images) (ROBERTO SCHMIDT via Getty Images)

As buyers retreat, the number of homes for sale are increasing.

Available inventory of single-family homes for sale increased by 1.3% for the week ending Oct. 2, according to Altos Research, which forecasts that the volume of unsold homes on the market could climb through October.

"It's common now to hear 8% mortgage rates being quoted to potential homebuyers. For many potential people in the market, it’s really easy for them to take a wait and see attitude," Altos Research CEO Mike Simonsen wrote in his weekly housing analysis. "Fewer offers are being made so inventory builds."

At the same time, homeowners largely remain averse to sell. Nationwide, 68,000 single-family homes were newly listed the week ending Oct. 2, 25% fewer than the same time last year.

The scarcity of new inventory on the market has so far kept prices elevated, making any increase in mortgage rates much more painful. Should the baseline rate hit 8%, homebuying activity would likely only get worse.

"The housing market will take a big hit this fall if rates do hit 8%. Prices won’t drop dramatically, because inventory is still relatively low, but transactions could fall to levels not seen since 2010," Sturtevant said. "The housing market will become a 'market of necessity,' where the buyers and sellers that are in the market are only those who have to move because of changes in the family, job, or financial circumstances."

Gabriella is a personal finance and housing reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.

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