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Mortgage rates top 7% for first time since April 2002

Mortgage rates surpassed 7% for the first time since April 2002, adding more reason for price-struck homebuyers to stay on the sidelines.

The rate on the average 30-year fixed mortgage hit 7.08%, up from 6.94% the week prior, according to Freddie Mac. Rates have jumped 3.86 percentage points since the start of the year, the largest year-to-date increase in over 50 years.

The dramatic increase in rates – driven by the Federal Reserve’s aggressive fight on inflation – has crushed homebuyer demand, while home sellers continue to lose confidence as price reductions become more common.

“With mortgage rates and inflation continuing to put pressure on homebuyers, demand will remain quite soft and in turn, I do see that continuing to push prices downward,” George Ratiu, senior economist and manager of economic research for Realtor.com, told Yahoo Money. “The big question is what needs to happen so we can see lower prices. It’s unsustainable to expect that prices can continue at elevated levels.”

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Rate hikes spook homebuyers

Demand for mortgages remained at its lowest point in 25 years last week, the Mortgage Bankers Association survey for the week ending October 21 found, as higher rates and economic uncertainty continue to erode buyer confidence. The volume of mortgage applications for purchases decreased 2% from one week earlier, and was 42% lower than the same week a year ago.

Rate hikes have caused the share of homebuyers to shift toward lower interest rate products, MBA data showed, such as Federal Housing Administration loans and adjustable-rate mortgages (ARMs) to ease the financial burden.

“Homebuyers feel they are in a race — Fed versus affordability — with a very little chance of winning,” Adriana Perezchica, president of Via Real Estate, told Yahoo Money. “I’ve been receiving calls from buyers trying to get qualified or just starting to explore the options to buy, I can hear on their voice the uncertainty of times to come, they really would like to get into a home, however the climate has not been very favorable and payments are unreachable, they have to settle for the minimum approved at nonexistent prices in the current market.”

As mortgage rate hikes continue, prospective homebuyers are losing their purchasing power.  Mortgage rates cut at least 100 square feet out of buyers' home searches in September, Redfin data found.  (Mike Stocker/Sun Sentinel/Tribune News Service via Getty Images)
As mortgage rate hikes continue, prospective homebuyers are losing their purchasing power. Mortgage rates cut at least 100 square feet out of buyers' home searches in September, Redfin data found. (Mike Stocker/Sun Sentinel/Tribune News Service via Getty Images)

The median listing price was $427,000 in September, according to Realtor.com, up 13.9% from last year. At last week’s rate of 6.94%, a monthly payment would be $2,260 after offering at least 20% down.

The figures have pushed many to reconsider their purchase plans or lower their expectations, Perezchica said.

“I have this family where mom, dad and their two adult children have to get pre-approved to qualify for $500,000. There are more options for them at this price point, their payment will be $4,460, simply out of their comfort zone,” Perezchica said. “They opted to only look for homes up to $400,000; this has put them at least an hour and half hour out of the metropolitan areas and with minimum options on bedrooms and bathrooms for such a numerous family.”

“This is a typical story in the last few months,” Perezchica said, “where a lot of buyers have been put off to purchase a home right now.”

An 'open house' flag is displayed outside a single family home on September 22, 2022 in Los Angeles, California. The U.S. housing market is seeing a slow down in home sales due to the Federal Reserve raising mortgage interest rates to help fight inflation. (Credit: Allison Dinner, Getty Images)
An 'open house' flag is displayed outside a single family home on September 22, 2022 in Los Angeles, California. The U.S. housing market is seeing a slow down in home sales due to the Federal Reserve raising mortgage interest rates to help fight inflation. (Credit: Allison Dinner, Getty Images)

Home sellers retreat

The plunge in homebuyer demand has persuaded more sellers to stay put.

The number of homes for sale at the end of September was 1.25 million, the National Association of Realtors found, down 2.3% from August. New listings were also down 17%, another sign that sellers are backing out of the cooled market.

Less than 46% of home offers written by Redfin agents in September faced competition, the lowest level since the start of the pandemic. As a result, a record 22% of homes for sale in September had a price reduction.

“For many, when they look at what it would cost to trade up, not only are they generally looking at a more expensive home, but they’re looking at a mortgage that is, in some cases, double what they have right now,” Ratiu said. “The impact on families' budgets is significant.”

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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