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Mortgage rates dropped, but lack of home inventory remains a concern

Mortgage rates dropped this week, but lack of homes for sale prevailed as the top concern among buyers.

The rate on the average 30-year mortgage decreased to 6.78% from 6.96% the week prior, according to Freddie Mac. Rates last week rose to their highest level since November 2022. But new government data showing that inflation has softened helped ease pressure on rates.

For homebuyers, the modest dip in rates wasn’t enough to ease affordability concerns. The lack of previously owned homes on the market has kept home prices elevated this summer.

And if there’s any winner in today’s market, it’s homebuilders — as buyers that haven’t been priced out yet turn to new construction.

“New home construction and sales are benefiting from a lack of available and affordable inventory in the existing home market, exacerbated to some additional degree by homeowners unwilling to give up low-rate mortgages,” Keith Gumbinger, vice president of HSH.com, told Yahoo Finance. “Selling and then hoping to buy another home exposes the seller-turned-buyer to both high home prices to be financed with much higher mortgage costs.”

Home affordability remains strained

For homebuyers still in the market, elevated rates and still-high home prices have deteriorated affordability.

Mortgage applications to purchase a home fell 1% for the week ending July 14, according to the Mortgage Bankers Association (MBA) latest survey of applications, and were 21% lower than the same week a year earlier.

“Despite last week’s lower rates, purchase applications decreased, as home purchase activity is still being held back by low housing supply and rates that are still much higher than a year ago,” Joel Kan, MBA’s deputy chief economist, said in a statement.

Today’s homebuyers have become increasingly rate-sensitive to any shifts in the market. Though Freddie Mac’s rates last week hit a high point for the year, new inflation data allowed rates to soften toward the end of the week. Still, that wasn’t enough to bolster purchasing activity.

A mailman delivers mail to a house for sale in Quincy, Mass.
A mailman delivers mail to a house for sale in Quincy, Mass. Elevated mortgage rates have continued to keep some homebuyers sidelined this summer. (Credit: Michael Dwyer, AP Photo)

The pullback in buyer demand is not surprising, given how much it costs to finance a home these days.

At last week’s rate of 6.96%, the monthly mortgage payment on a median listing price home of $445,000 was $2,565. According to Realtor.com, two weeks ago, when rates were 6.81%, the monthly payment was $2,527. That’s after at least a 13% down payment.

“There’s been a lot of interest in buying, but the problem again is that there’s not enough inventory of previously owned homes,” Monte Miner, real estate agent at Ironwood Fine Properties, told Yahoo Finance. “The homes that are out there in their budgets, well, they’re not in great shape. But we still see offers being made, just a couple of days in the market at full price of $600,000.”

“That’s on a home that, before, may have sold well under the $600,000 asking price,” added Miner.

The lack of existing homes on the market has given homebuilders the upper hand

New house for sale is shown in Beaverton, Ore. The lack of existing homes on the market have pushed homebuyers toward new builds. (Credit: Don Ryan, AP Photo)
New house for sale is shown in Beaverton, Ore. The lack of existing homes on the market have pushed homebuyers toward new builds. (Credit: Don Ryan, AP Photo)

The share of previously owned homes shrunk to a historic low, data released Thursday morning by the National Association of Realtors found. Sales of existing homes fell 3.3% in June from the month prior to an annualized rate of 4.16 million — that's 18.9% lower than a year ago.

As a result, homebuilder confidence rose to a 13-month high in July, as strong buyer demand coupled with tight supply of existing homes drove more buyers toward new construction.

Though housing starts, which include single- and multi-family units, decreased to a seasonally adjusted annual rate of 1.434 million units in June, new construction has been going strong.

“The lack of resale inventory means prospective homebuyers who have not been priced out of the market continue to seek new construction in greater numbers,” National Association of Homebuilders chief economist Robert Dietz wrote in his Eye on Housing blog.

But some challenges remain that may put a damper on new builds. Lack of available lots, rising interest rates, and tight supply of raw materials such as lumber and steel could cause delays in new construction, NAHB found.

“Builders are troubled over rising mortgage rates approaching 7% and continue to grapple with supply-side challenges, including ongoing scarcity of electrical transformer equipment and growing concerns about lot availability.”

Gabriella Cruz-Martinez is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.

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