Home affordability took another hit this week as mortgage rates neared 7%, forcing many buyers to stick to the sidelines.
The rate on the 30-year fixed mortgage increased to 6.81% from 6.71% the week prior, according to Freddie Mac, the highest level in 2023 and since November.
Rates followed an uptick in the 10-year Treasury yield after a government report released last week showed inflation remained sticky and minutes released this week from the Federal Reserve’s last meeting revealed a more hawkish stance toward future rate increases.
The jump in rates has hurt housing activity this summer — dissuading homeowners from listing, keeping the inventory of homes for sale alarmingly low, and worsening purchasing conditions for buyers.
“The increase in rates has stopped the market,” Luis Padilla, CEO of Oceanside Realty and Padilla Team in Miami, told Yahoo Finance. “People are only moving if they have to. That move-up buyer doesn’t want to sacrifice their low interest rate. It’s a segment of the market that’s pretty much gone.”
Purchase demand hits low point this month
As rates ticked higher last week, rate-sensitive buyers pulled back from their purchase plans once more — a recurring theme this year.
Purchase applications decreased 5% on a seasonally adjusted basis for the week ending July 6, the Mortgage Bankers Association’s survey found, and were 22% lower than the same week a year ago. Overall, the volume of mortgage applications hit its lowest level in a month.
The average loan size for a purchase application also declined to $423,500 for the week ending July 6, the MBA found, its lowest level since January 2023.
“This was likely driven by reduced purchase activity in some high-price markets and more activity in some of the lower price tiers as buyers searched for more affordable options,” MBA Deputy Chief Economist Joel Kan said in a statement.
Just 45.6% of new and existing homes sold between January and the end of March were affordable to families earning an income of $96,300, a study by the National Association of Home Builders and Wells Fargo Opportunity Index revealed. While this is up from 38.1% at the year-end of 2022, it was still near the lowest level since the NAHB first began tracking the data.
“Rates are still over a percentage point higher than a year ago, and housing affordability is still a challenge in many parts of the country,” Kan said.
Rate-trapped homeowners have remained hesitant to list this summer, aggravating the market’s persistent inventory problem.
As of the week ending July 5, there were 467,000 single-family US homes on the market nationwide. That’s down 2% from last year, according to Altos Research. By comparison, inventory was climbing between 4% and 6% per week during the same time in 2022.
There were also 385,000 single-family homes in contract for the week ending July 5, about 14% fewer than last year at this time. Though the current sales pace seems to have peaked for the year, data indicates that this year will end with 15% fewer homes on the market compared with 2022.
“At this point, people are mostly adjusted to higher mortgage rates. There are buyers at these home prices and these mortgage rates, but they are still sensitive to big changes in the rates,” Mike Simonsen, CEO of Altos Research, wrote in his blog. “If rates surge to 7.5% — as they did in September — then we’ll have a dramatically slower autumn again this year.”
Simonsen added: “This recovery could very easily see another downturn.”
Gabriella Cruz-Martinez is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.