Mortgage rates pulled back this week, a well-needed pause for price-stricken homebuyers.
The rate on the 30-year fixed mortgage retreated to 5.70% this week — down from 5.81% the week prior, according to Freddie Mac. Still, rates recently tracked up a whopping 72 basis points within a three-week period, remaining nearly two-and-a-half percent points higher than at the start of the year.
The rapid surge in borrowing costs rattled first-time buyers who are seeing their affordability decline and confidence wane. On the other hand, homeowners are reluctant to sell and give up their ultra-low rates, experiencing a rate lock-in effect.
“The rapid rise in mortgage rates has finally paused, largely due to the countervailing forces of high inflation and the increasing possibility of an economic recession,” Sam Khater, Freddie Mac’s chief economist, said in a press statement. “The pause in rate activity should help the housing market rebalance from the breakneck growth of a seller’s market to a more normal pace of home price appreciation.”
Homebuyers lean on government-backed loans
Inflation concerns cooled the once red-hot housing market, with first-time homebuyers feeling the strain of rising borrowing costs. The effects have already made their mark as purchase applications dwindled in recent weeks.
The volume of purchase mortgage applications remain largely flat this week, up 0.7% on a seasonally adjusted basis from one week prior, according to the Mortgage Bankers Association survey for the week ending June 24. On an unadjusted basis, the purchase index was down 21% compared to a week ago, and 24% lower than a year earlier.
“Mortgage rates continue to experience large swings,” Joel Kan, associate vice president of industry surveys and forecasts for the MBA, said in a press statement. “Overall purchase activity has weakened in recent months due to the quick jump in mortgage rates, high home prices, and growing economic uncertainty.”
In the wake of rising rates, an increasing number of would-be buyers have opted to use government loan applications or ARMs. According to the MBA, this is to offset the sharp increase in borrowing costs which have eaten away at their budgets.
“In the for sale market, people are looking for all kinds of strategies to buy,” Taylor Marr, deputy chief economist for Redfin, told Yahoo Money. “Some buyers are able to switch to an adjustable rate mortgage or work with their parents to borrow money from equity in their home, rather than take out a more pricey mortgage. So all cash sales from ‘mom and pop’ are becoming more commonplace to mitigate the rising costs of mortgages.”
Starter homes remain in short supply
Higher rates and double-digit home price growth have cast the dream of homeownership beyond reach for some entry-level buyers.
The median home price hit a new record in June, climbing to $450,000, up 17% from last year and up 31.4% compared to June 2020. In popular metro areas, the median listing prices jumped 13.3% compared to last year.
According to Realtor.com, at the current rate, homebuyers are looking at a monthly payment of about $2,100. That’s more than $800 higher than June of 2021.
“As prices have moved up the inventory of first-time, starter homes that typically first-time buyers purchase are in very short supply,” Len Kiefer, deputy chief economist for Freddie Mac, told Yahoo Money. “It’s a challenge, a big pinch for those first time homebuyers.”
Still, there are some early signs of inventory levels recovering. In June, the U.S. inventory of active listings grew 18.7% year-over-year. While this is good news, there are still fewer than half (-53.2%) as many for-sale homes compared to June 2019.
“At the midpoint of 2022, housing markets are clearly headed for a reset as rising supply is blending with cooling demand,” George Ratiu, manager of economic research at Realtor.com, said in a press statement. “The number of homeowners listing their homes for sale has been growing for two straight months compared with a year ago, bringing more options for home buyers to choose from.”
Homeowners are rate-locked in
Homeowners that were planning on trading up, are now thinking it twice.
As borrowing costs continued to surge, selling their home means giving up their ultra-low mortgage rates for a costlier loan. According to Redfin, some 51% of homeowners have a mortgage rate under 4%. During the fourth quarter of 2021, the average mortgage rate was 4.2%.
According to economists, it's likely that rates will continue to climb this year.
“Many homeowners locked in right under 4%,” Kiefer said. “The high rates today don't directly affect their monthly payment. The only challenge is homeowner equity. If homeowners want to do a cash out refinance, they may have to reset their rate quite a bit higher – so that will be more costly.”
As rates approach 6%, the chances to refinance at a lower rate evaporated. According to the MBA, refinances are 80% lower than a year ago, and over 60% below the historical average.
“Those that refinanced last year may not want to sell their house now because they’re not going to find the same loan terms that they once did,” Nadia Evangelou, senior economist and director of forecasting for the National Association of Realtors, told Yahoo Money. “Rates that are under 3%, we don’t have that anymore.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.