Mortgage rates inched down further after their huge drop last week, spurring more homebuyers and owners to lock in rates.
The rate on the average 30-year fixed mortgage declined to 6.58% this week from 6.61% the week prior, according to Freddie Mac. Rates last week plunged nearly a half-percent, following a sharp decline in the yield on the 10-year Treasury after a government report showed inflation cooled last month.
The sudden decline in rates prompted some buyers to secure the lower rate, but with rates nearly 4 percentage points higher than at the start of the year, other price-conscious homebuyers stuck to the sidelines.
“The decline in rates is a window of opportunity for buyers, especially those that have seen their purchasing power limited by recent rate hikes,” Adriana Perezchica, president of Via Real Estate, told Yahoo Money. “I’ve had clients react quickly eager to lock in a rate, at the same time, there are clients that are uncertain about the current economic landscape and prefer to wait it out.”
Buyers scramble to lock rates
Last week’s near half-point decline in mortgage rates sent some buyers scrambling to secure a rate, according to several lenders.
“I wanted to lock in as many contracts as possible," Perezchica said. "We just don’t know when rates would increase again.”
Demand for mortgages jumped for the second week in a row, according to the Mortgage Bankers Association latest survey of applications, with purchase applications rising 4% from a week ago. The sudden decline in rates improved buyers' purchasing power, the MBA cited, especially for those who had been priced out by rate hikes this year.
One of Perezchica's clients saw their pre-approval budget increase by $60,000 after rates improved last week. “It’s a great advantage, it meant they could get a home closer to the city that the previous budget couldn’t afford,” she added.
Still, the sudden dip in rates wasn’t enough to lure some weary buyers back into the market.
Home affordability worsened in October, according to the MBA, with mortgage application payments spiking 3.7% to $2,012, a new survey high. That’s up from $1,941 in September and increases the median payment by an extra $629 over the first 10 months of the year.
According to Realtor.com, in order for this year’s buyer to have the same monthly payment as last year, given a 7% interest rate, the median home price would have to decline by 45% to about $235,000. The national median list price for a home in October currently stands at $425,000.
At the current rate of 6.58%, the principal and interest payment to finance 90% of a $425,000 home would be $2,438 after putting at least 10% down. That's approximately, 40.6% of the monthly median income for a median-income household earning $72,000 annually, according to figures provided by Realtor.com.
“We all like to think that when rates fall, housing becomes extremely affordable but it’s also true that home prices need to adapt to the interest-rate environment,” Andy Walden, vice president of enterprise research and strategy at Black Knight, told Yahoo Money. “Even with rates roughly at 6%, we’re at 35-year lows in terms of affordability because home prices and incomes remain out of balance.”
Few homeowners can benefit from refinancing
Higher rates this year have badly bruised homeowners opportunities to refinance, but the recent dip in rates encouraged some to lock rates.
Refinance activity increased 2% from the previous week, according to MBA survey for the week ending November 18, but overall refi demand is 86% lower than a year ago.
With rates roughly above 6%, less than 1% of the 53.3 million homeowners in the country stand to benefit from refinancing, according figures mortgage technology and data provider Black Knight previously shared with Yahoo Money.
“People who might have purchased two years ago and had a chance to refinance, they very likely have a mortgage rate somewhere around 3% to 4.5%, speaking conservatively,” George Ratiu, senior economist and manager of economic research for Realtor.com, told Yahoo Money. “The cost to trade up is more expensive.”
Homeowners seeking to sell their home are also facing challenges, as higher rates and elevated home prices have shrunk the number of buyers in the market. Sellers are increasingly offering price reductions to induce buyers.
The share of homes with a price cut increased to 20.9% in October from 10.6% a year ago, according to Realtor.com. In November, some 37% of builders also issued price reductions, up from 26% the month prior.
“In this kind of market, the buyers who have gained some negotiating power are mostly those repeat buyers,” Jason Sharon, owner and broker at Home Loans Inc., told Yahoo Money. “Still, more people will probably want to hunker down and stick to the lower rate they already have.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.