The interest rate on America’s most popular home loan rose this week amid record inflation and growing fears that the economy is on the verge of a recession.
The average rate for a 30-year fixed mortgage is now almost double what it was last year, according to a new report.
At current interest rates, the monthly mortgage payment for a median-priced home is 59% higher than it was a year ago, according to Realtor.com.
Higher borrowing costs, coupled with still painful property prices, are cooling the market considerably.
“It’s becoming increasingly clear that real estate markets are headed for a correction,” said George Ratiu, senior economist at Realtor.com.
30 Year Fixed Rate Mortgages
The average rate on a 30-year fixed mortgage is 5.54%, down from 5.51% last week, housing finance giant Freddie Mac reported on Thursday. At this time last year, the 30-year rate averaged 2.78%.
The market is feeling the heat as the rate edged higher for the second week in a row. Demand for mortgages fell to its lowest level in more than two decades and sales fell for the fifth consecutive month.
Competition plummets as potential buyers abandon the home buying process.
Some 60,000 purchase contracts were canceled last month, according to property company Redfin. This equates to 14.9% of homes that were under contract during the month and a near record high.
“Consumer concerns about rising rates, inflation and a potential recession are manifesting in slowing demand,” said Sam Khater, chief economist at Freddie Mac. “Because of these factors, we expect house price appreciation to moderate significantly.”
Average home price appreciation is expected to reach 4% next year, from 12.8% this year, according to a new forecast from Freddie Mac.
15-year fixed rate mortgages
The 15-year fixed-rate mortgage – popular with refinancing homeowners – is averaging 4.75%, down from 4.67% last week, according to Freddie Mac. The 15-year rate is more than double what it was last year at this time, when it averaged 2.12%.
The higher rates are leading to a rebalancing of the housing market in many areas. In Austin, for example, buyers are regaining bargaining power as sales fell 20% last month and new listings rose by the same amount.
“When we look at Austin’s housing market data, it reinforces what we’re seeing nationally: a combination of slowing demand from the tremendous surge in mortgage rates and rising prices with a noticeable increase in supply,” says Ratiu.
“The change signals welcome news for more shoppers who may be ready to embrace a post-pandemic reality and take advantage of more inventory.”
5 Year Adjustable Rate Mortgages
At 4.31%, the five-year variable rate mortgage — or five-year ARM — is actually down from last week, when it averaged 4.35%. Last year, at this date, the short-term rate averaged 2.49%.
Adjustable mortgage rates are tied to the prime rate. ARMs start out with lower interest charges, but may increase after the initial fixed rate period ends.
This week’s slight drop could push some buyers into ARMs. Those taking out a five-year ARM now hope they will have the option to refinance into a lower fixed-rate mortgage by the time their five-year term expires.
What could drive rates even higher?
Mortgage rates have risen significantly in recent months as the Federal Reserve raised its own borrowing rate in its fight against inflation, though analysts fear the hikes could trigger a recession.
Next week, the central bank is expected to raise its key rate for the fourth time this year.
Freddie Mac predicts that the 30-year mortgage rate will average 5% this year, two percentage points higher than last year’s average. Next year, the rate should average 5.1%.
“As the market cools, it doesn’t come to a screeching halt,” says Shoshana Godwin, Redfin real estate agent in Seattle. She suggests buyers who can still afford to buy in today’s market are doing so as competition wanes.
Indeed, mortgage activity, an indicator of market strength or weakness, fell for the third week in a row and hit its lowest level since 2000.
Mortgage applications fell 6.3% from the previous week, according to the latest Mortgage Bankers Association survey.
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