Well, folks, the average mortgage rate in the US for 30 years just bumped up a tiny tad this week, peaking at 7.19% from last week’s rate of 7.18%. This makes it the sixth straight week where rates have sailed above that daunting 7% mark – as per Freddie Mac’s data. Now rewind back to this time last year, and you’d find the 30-year fixed-rate cozily sitting at 6.29%.
The climb didn’t just happen by chance; it happened to fall right on the heels of the Federal Reserve hinting on Wednesday that their key interest rate would keep its nose up for a stretch yet undefined. Such a development drags along as a key puppeteer pulling strings in today’s housing market scenario. So what’s happening is that potential house buyers are being sideswiped due to inflated borrowing costs while existing homeowners are hunkering down and resisting selling given the low rates they’re currently enjoying.
Link Between Federal Reserve and Mortgage Rates
Although fixed mortgage rates aren’t directly influenced by the Fed’s rate, they usually follow the yield on the 10-year Treasury, which has been increasing in line with the central bank’s rate hikes. Therefore, a surge in mortgage rates is anticipated. Lawrence Yun, chief economist at the National Association of Realtors, suggested, “In the short run, mortgage rates might rise up to 8%.” The recent announcement from the Federal Reserve is also a strong indication that another rate hike may be imminent by year-end.
The Federal Reserve maintained the current range between 5.25% and 5.5% and hinted at the possibility of another quarter-point hike this year.
Impact on Housing Affordability and Sales
As mortgage rates soared during the Federal Reserve’s inflation-curbing initiative, housing affordability plummeted to its lowest point in decades. Orphe Divounguy, Zillow’s senior economist, mentioned, “Housing affordability has reached 40-year lows due to mortgage rates that doubled last year, further restricting supply.”
- Sales of previously owned homes dropped 0.7% from July, reflecting a reduced pace in the current housing cycle.
- Inventory has seen a downturn with only 1.1 million units available at the end of August, a 14.1% decrease year-over-year.
- Builder sentiment has dwindled, as evidenced by the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), which displayed a drop in confidence for two consecutive months.
- Overall home sales have plummeted by 20% year-to-date compared to the previous year.
Why Homeowners Hesitate to Sell
Given the current mortgage landscape, over 90% of mortgage holders have rates of 6% or below. Data from Black Knight, a real estate data firm, suggests that a significant number of these holders enjoy rates between 2% to 4%. Understandably, this group is reluctant to enter the buyer’s market at a rate of 7% or more. The current housing inventory crunch is also due to homeowners who had secured their homes at lower rates being hesitant to sell, further contributing to the dip in overall home sales.
A Glimmer of Hope for Homebuyers
Despite the prevailing challenges in the housing market, Jiayi Xu, an economist at Realtor.com, provides a silver lining for potential buyers. According to Xu, the onset of fall generally brings more favorable buying conditions compared to other times of the year. “Historical data suggests that the first week of October could be the optimal time for home purchases. During this period, home prices typically drop below peak levels, competition decreases, and the housing inventory expands when compared to the bustling summer months,” Xu noted.
Final Thoughts
Without a doubt, the prevailing circumstance of skyrocketing mortgage rates has considerably reshaped the dynamics of the housing market. As it stands, current homeowners are basking in the delight of their securely low rates while aspiring buyers bear the hardship of steep borrowing costs. It’s safe to say that all attention is riveted on the Federal Reserve and its future choices, which will inevitably continue to define the course of the housing market.
Immediately noticeable, is the impact of continued high mortgage rates. This can be seen through dropping house sales and increasing affordability issues. Yet, when it comes down to the long-term aftereffects for both our US economy and housing market, we’re pretty much left guessing. Given that interest rates serve as major tools for performing economic control, these choices will surely set off far-reaching repercussions over a variety of sectors.
