U.S. mortgage rates moved higher this week amid signs that the Federal Reserve will continue to raise its benchmark interest rate.
When the Fed raises its benchmark interest rate, which it has done four times this year, the cost of borrowing money for homes generally rises as well.
But even though consumers will pay more to finance a home, they may find solace elsewhere in the housing market.
“The silver lining for those still looking for a home is that homes are staying on the market longer, prompting sellers to lower asking prices and leaving room for negotiation,” says George Ratiu, senior economist for Realtor.com.
“As we head into fall and the pace of sales slows even further, some shoppers may find that the sales are getting bigger, offering bargains that fit their budgets.”
30 year fixed rate mortgages
The average interest rate on America’s most popular mortgage loan — the 30-year fixed mortgage — rose to 5.66 percent, from 5.55 percent a week ago, mortgage giant Freddie Mac said Thursday. A year ago, the standard rate for a 30-year mortgage was 2.87%.
“The market’s renewed perception of a more hawkish monetary policy stance has driven mortgage rates to nearly double where they were a year ago,” says Sam Khater, chief economist at Freddie Mac.
That perception was renewed last week when Fed Chairman Jerome Powell told a conference of economists that further increases in the federal funds rate would be necessary to cool the economy and combat still-high inflation.
“While higher interest rates, slower growth and softer labor market conditions will reduce inflation, they will also bring pain to households and businesses,” Powell said last week at an economic symposium in Jackson Hole, WY.
“This is the unfortunate cost of deflation. But a failure to restore price stability would mean much greater pain.”
15 year fixed rate mortgages
The rate on a 15-year mortgage averaged 4.98 percent this week, up from 4.85 percent last week, Freddie Mac says. Last year at this time, the 15-year rate averaged 2.18%.
With interest rates returning to recent summer highs, typical homebuyers are now paying about 60% more than last year for their monthly mortgages, Ratiu says.
Some buyers are putting their home searches on hold amid higher interest rates and uncertainty about the economy. Predictably, home sales are slowing and price increases are moderating.
For the first time in more than 17 months, the average home sold for less than its list price in August, according to a report by real estate firm Redfin.
“There are signs that there is more room for the market to ease,” says Daryl Fairweather, chief economist at Redfin. “The slowdown after Labor Day will likely be a little bit sharper this year than in years past when the market was extremely tight.”
“Homebuyers’ budgets are increasingly being squeezed by rising interest rates and continued inflation, so sellers need to make their homes and prices attractive to attract buyers at this busy time of year.”
5 year mortgage with adjustable interest rate
The average interest rate on a five-year adjustable-rate mortgage, or ARM, hit 4.51 percent this week, up from 4.36 percent last week.
A year ago, the 15-year rate averaged 2.43%.
When longer-term mortgage rates rise, some borrowers look to adjustable rate mortgages, which have lower interest rates to begin with.
With a 5/1 ARM, for example, the interest rate is set for the first five years and then adjusted annually, moving up or down in lockstep with the prime rate or other benchmark.
If longer-term interest rates fell after the initial term of an ARM, a borrower could potentially refinance at a lower rate. There is risk in this approach, of course, as rates could rise.
Home loan applications continue to decline
Last week, mortgage applications fell by 3.7% compared to the previous week, the Mortgage Bankers Association (MBA) said.
“Mortgage rates and bond yields rose last week as Federal Reserve officials signaled that short-term interest rates will remain higher for longer,” says Joel Kan, MBA’s associate vice president for economic and industry forecasting. .
Applications for mortgage refinancing, which are particularly sensitive to interest rate movements, plunged 8% from the previous week, while applications for home loans fell 2%, the MBA said.
Refi apps now make up just 30% of all apps. A year ago at that time, they were making over twice as much.
Where are prices headed?
The 30-year mortgage rate will remain between 5% and 6% in the coming months, Ratiu says, citing high inflation and tighter Federal Reserve policies.
The long-term mortgage rate typically tracks the 10-year Treasury yield, which has risen in recent days.
“Financial markets continue to react to the Federal Reserve’s firm commitment to monetary tightening in order to bring inflation closer to the 2% mark,” says Ratiu.
With rates rising, the number of buyers is likely to continue to decline.
The average American family can no longer afford to buy a median-priced home when mortgage rates top 5.7 percent, says Nadia Evangelou, senior economist at the National Association of Realtors.
At that point, he says, the typical family must spend more than 25 percent of their income on their monthly mortgage payment.
“Adding other expenses such as mortgage insurance, home insurance, taxes and property maintenance costs, buying a home becomes burdensome for the typical family,” Evangelou says.
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