Homebuilder confidence has been rising over the past few months, and housing starts rose 21.7% from April. Strong new home sales have gotten the new construction industry back on track to deliver much-needed inventory for this undersupplied market. They now supply about 30% of the residential sales market.
“This spring shopping season has buyers searching for listings and affordability – both of which can be found in new construction – with many builders offering incentives and fresh inventory,” said Zillow Senior Economist Nicole Bachaud in a statement. “This has brought a resurgence to the new construction industry with sales rising and home builder confidence climbing.’
The new home market stands in contrast to the existing re-sales market, which has sputtered due to record-low inventory and high listing prices. Still, Zillow economists said, there are signs that the existing home sales market might be growing.
The median sales price of new homes sold in May 2023 was $416,300 versus $396,100 for existing home sales. The average sales price for new homes was $487,300.
The seasonally‐adjusted estimate of new houses for sale at the end of May was 428,000. This represents a supply of 6.7 months at the current sales rate.
Demand has been resilient as people grow accustomed to interest rates in the 6%-7% range, and existing inventory remains tight, economists said. These factors are making new homes more visible on the market, while homeowners looking to trade up are attracted by new floor plans, more technology, as well as higher efficiency, noted George Ratiu, chief economist at Keeping Current Matters.
After a winter of dire housing market forecasts, the housing market regained its footing this spring, with home prices rising month-over-month for the third consecutive month in April, according to the S&P CoreLogic Case-Shiller National Home Price Index, which was released Tuesday. These increases came after seven consecutive months of decline.
“The index tracks price changes from the months of February, March, and April of 2023, and spotlights a growing number of buyers coming to terms with higher rates and looking for a path toward homeownership,” George Ratiu, the chief economist at Keeping Current Matters, said in a statement. “Inflation has been a headlining concern for most consumers over the past year, even as price growth had moderated noticeably. At the same time, households have seen interest rates push borrowing costs higher across the board for credit cards, auto loans, and home mortgages. At the same time, the official end of the pandemic signaled a return toward a new normal, encouraging Americans to embrace their next stage of life.”
On a monthly basis, the national index was up 1.3% in April. However, on a year-over-year basis, the index was down 0.2%, compared to an annual gain of 0.7% in March.
“The U.S. housing market continued to strengthen in April 2023,” Craig Lazzara, the managing director at S&P DJI, said in a statement. “Home prices peaked in June 2022, declined until January 2023, and then began to recover.”
Just like in March, both the 10-city and 20-city composite price indexes posted annual declines but monthly gains. For the 20-city composite, after seasonal adjustment, 17 out of the 20 cities reported lower prices in the year ending April 2023 versus the year ending March 2023. Boston, San Francisco and Cleveland all showed slight increases at 0.1%, 0.1%, and 0.9%, respectively.
Miami topped the list yet again with the highest annual price gain at 5.2%, with Chicago (4.1%) and Atlanta (3.5%), rounding out the top three.
“At the other end of the scale, however, the worst eight performers are all in the Mountain or Pacific time zones, with Seattle (-12.4%) and San Francisco (-11.1%) at the bottom,” Lazzara said. “The Southeast (+3.6%) continues as the country’s strongest region, while the West (-6.9%) remains the weakest.”
Overall, the 20-city index was down 1.7% on an annual basis, but up 1.7% on a monthly basis, while the 10-city index fell 1.2% year-over-year and rose 1.7% month-over-month.
“If I were trying to make a case that the decline in home prices that began in June 2022 had definitively ended in January 2023, April’s data would bolster my argument,” Lazzara said. “Whether we see further support for that view in coming months will depend on the how well the market navigates the challenges posed by current mortgage rates and the continuing possibility of economic weakness.”
The 30-year fixed rate for conventional loans was 6.90% at Mortgage News Daily on Thursday morning, down seven basis points from the previous week. HousingWire’s Mortgage Rates Center showed Optimal Blue’s 30-year fixed rate for conventional loans at 6.67% on Wednesday, compared to 6.71% the previous week.
“Potential homebuyers have been watching rates closely and are waiting to come off the sidelines,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “However, inventory challenges persist as the number of existing homes for sale remains very low. Though, a recent rebound in single-family housing starts is an encouraging development that will hopefully extend through the summer.”
Altos Research data showed just 451,000 single-family homes on the market as of June 16, compared to 950,000 in June 2019.
According to the National Home Builders Association, June was the sixth straight month of increased builder confidence. It’s also the first time sentiment levels surpassed the midpoint of 50 (out of 100) since July 2022. In June, the score was 55.
“This summer’s housing market shows signs of normalizing in the wake of an unprecedented period,” George Ratiu, chief economist of Keeping Current Matters, said in a statement.
“The unique real estate circumstances of the 2020-22 period—government-mandated quarantines, remote work, massive fiscal and monetary easing—could be better characterized as “unicorn years,” not easily repeatable. Any comparisons to those years may cast a shadow over the current market. At the same time, a return toward historical trends is a welcome move in the right direction.”
Per Ratiu’s estimates, the current buyer of a median-price home has a monthly mortgage payment of $2,300, up $220 compared to a year ago. However, many of last year’s buyers saw mortgage payments increase by $1,000 from the prior year due to higher prices and surging rates.
“The difference in monthly payments is becoming less dramatic than in 2022,” Ratiu said.
Monetary policy
Investors are focusing on the second half of the year, anticipating further monetary tightening as Fed Chairman Jerome Powell set expectations of additional rate hikes in his testimony in Congress on Wednesday.
“Chairman Powell made clear today that the pause at this month’s meeting was most likely temporary,” Marty Green, principal at the law firm for residential mortgage lenders Polunsky Beitel Green, said in a statement.
“Inflation concerns continue to be at the forefront. One benefit in telegraphing a potential increase in rates at future meetings is that it dampens or eliminates the hope of possible decreases in the fed funds rate for the remainder of 2023, which some market participants continued to harbor.”
Realtor.com economist Jiayi Xu said, “With the potential for additional rate hikes ahead, mortgage rates will remain elevated throughout the remainder of the year.”
“As a result, affordability will continue to be an important factor in buyers’ home purchasing decisions,” Xu said in a statement.
Policymakers also want to evaluate the impact of their actions on the economy so far. The Fed imposed its fastest series of rate increases since the 1980s, but it wants to avoid over-tightening and causing a significant recession.
May’s inflation data aided the Fed in making today’s decision. The Consumer Price Index in May rose just 4% year over year, before seasonal adjustment, compared to a 4.9% increase in April. Real wages also continue to fall, suggesting that the Fed has cooled, if not broken, the labor market.
“Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,” the Fed said in its post-meeting statement. “In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
But it’s a delicate balance.
A series of bank failures — including Silicon Valley Bank, Signature Bank and First Republic Bank — have spurred concerns that banks are reducing their appetite for new loans, hurtling the economy towards a recession. Fears of a commercial real estate collapse have also emerged.
Fed Chairman Jerome Powell told reporters on Wednesday that it makes sense to moderate rate hikes as the policymakers get closer to the destination. The benefits of that, according to Powell, is that the Fed officials can access more information to make better decisions.
“The main issue that we’re focused on now is determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time,” Powell said. “So, the pace of the increases and the ultimate level of increases are separate variables. Given how far we have come, it may make sense for rates to move higher, but at a more moderate pace.”
Regarding the banking crisis, Powell said that “we don’t know the full extent of the consequences of the banking turmoil that we’ve seen.” However, with today’s decision, the Fed will “have some more time to see that unfolding.”
What’s next?
Investors are waiting for indications of what will happen next, as the macroeconomic policy crafters have yet to break the labor market and inflation levels are still double the 2% target.
The CME FedWatch Tool showed a 98% chance the Fed would hold rates at the current range on Wednesday morning, according to interest rate traders. However, 60% of these investors bet officials will impose a rate hike at the July 26 meeting.
In favor of another rate hike is the fact that employment continues to rise and consumer spending has been resilient. According to the latest labor market report, total nonfarm payroll employment rose by 339,000 jobs in May, compared to April.
The FOMC published new projections for the U.S. economy that expect the GDP to change by 1% in 2023 compared to 0.4% estimated in its March meeting. The unemployment rate is expected to be at 4.1% (compared to 4.5% in March) and the PCE inflation is projected to be at 3.2% (compared to 3.3% in March).
Policymakers also expect the federal funds rate at 5.6% at the end of 2023, which opens the door to the possibility of two rate hikes at the end of this year. March’s projection was at 5.1%.
“Looking ahead, nearly all Committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down to 2%,” Powell said. “We have been seeing the effects of our policy tightening on demand in the most interest rate sensitive sectors of the economy, especially housing and investment. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation.”
Today’s Fed decision will have an impact on the housing market. Industry experts believe mortgage rates will remain high compared to last year.
Ahead of the Fed meeting, mortgage applications picked up last week as rates dropped slightly – another factor that impacted rates was the debt ceiling agreement.
On Wednesday afternoon, mortgage rates for 30-year fixed-rate mortgages were at 6.70%, according toHousingWire‘s Mortgage Rates Center. However, at Mortgage News Daily, mortgage rates were higher, at 6.98%.
“For real estate markets, today’s decision by the Fed will ensure that mortgage rates are likely to keep moving sideways for the next couple of months,” George Ratiu, chief economist at Keeping Current Matters, said in a statement. “The 30-year fixed mortgage rate has moved in the 6% – 7% range since mid-November 2022, cresting the upper limit several times over the past few weeks.”
The Fed’s pause means borrowers can see, for June, a stabilization of rates across a range of industries, particularly mortgage and credit cards, according to Michele Raneri, vice president and head of U.S. research and consulting at TransUnion.
Raneri said in the mortgage market, “It remains to be seen if, in the short term, this will spur many who have been holding off to finally engage in a new purchase or refinance, or if they will continue waiting until rates begin dropping.”
The 30-year fixed rate for conventional loans was 7.03% at Mortgage News Daily as of Thursday morning. HousingWire’s Mortgage Rates Center had Optimal Blue’s 30-year fixed rate for conventional loans at 6.73% on Wednesday, up from 6.50% the previous Wednesday.
“Although the probability of a default remains low, even the fears and panic related to a potential government default could cause creditors to ask for higher interest rates from the U.S. Treasury, resulting in a significant increase in various borrowing costs, including mortgages,” Jiayi Xu, an economist at Realtor.com, said in a statement.
Xu added, “Resolving the debt impasse sooner rather than later would mitigate potential adverse effects on the housing market, which is already contending with high prices and elevated mortgage rates.”
George Ratiu, a chief economist at Keeping Current Matters, agrees that the likelihood of default is “virtually nil” but adds to existing risks, which are reflected in the spreads between the 10-year Treasury and the Freddie Mac 30-year mortgage rate.
The spreads were at 172 bps on average between 1971 and 2023, but reached 278 bps from January to May 2023. The only times the spreads exceeded 300 bps were during periods of high inflation or economic volatility, such as in the early 1980s or the Great Financial Crisis of 2008-09.
“Investors are reacting to the political brinkmanship over the debt limit, which is injecting another shot of uncertainty into the financial outlook,” Ratiu said in a statement. “Mortgage bond investors are looking for higher yields in exchange for the increase in perceived risk.”
A debt ceiling agreement, however, may not mean less economic volatility. The U.S. can still face a downgrade to its long-term debt. On Wednesday, Fitch Ratings placed the U.S. “AAA” rating on a negative watch.
“Fitch still expects a resolution to the debt limit before the x-date. However, we believe risks have risen that the debt limit will not be raised or suspended before the x-date and consequently that the government could begin to miss payments on some of its obligations,” the rating agency wrote.
Fed’s next steps
Another source of uncertainty is the Federal Reserve‘s (Fed) monetary policy. Officials will meet on June 13-14 to decide on the new federal funds rate. And, despite mortgage industry experts believing the Fed is likely to stop its tightening monetary policy, a still-resilient economy brings the possibility of another rate increase.
“An additional area of focus revolves around the release of the Federal Reserve’s minutes from its May meeting: although investors anticipate a pause at the upcoming meeting after ten consecutive rate hikes, the minutes revealed a sense of uncertainty regarding the future direction of monetary policy,” Xu said.
Ratiu added that the Fed’s willingness to take a break from its monetary tightening at the June meeting, as expressed by Chair Jerome Powell, may be a welcome reprieve for financial markets.
“However, the Fed has its eyes clearly fixed on the inflation double-peaks from the late 1970s and early 1980s, seeking to avoid the same mistake,” Ratiu said. “For people who assume that the central bank is done pushing the policy rate higher, prices riding an upward trajectory may provide a counterpoint.”
According to Sam Khater, Freddie Mac’s chief economist, the U.S. economy is showing continued resilience which, combined with debt ceiling concerns, led to higher mortgage rates this week.
“Dampened affordability remains an issue for interested homebuyers and homeowners seem unwilling to lose their low rate and put their home on the market,” Khater said in a statement. “If this predicament continues to limit supply, it could open up an opportunity for builders to help address the country’s housing shortage.”
Mortgage rates inched down last week, after a slight increase the week before.
The 30-year fixed-rate mortgage averaged 6.33% in the week ending January 12, down from 6.48% the week before, according to Freddie Mac. A year ago, the 30-year fixed rate was 3.45%.
“While mortgage rates have resumed their decline, the market remains hypersensitive to rate movements, with purchase demand experiencing large swings relative to small changes in rates,” said Sam Khater, Freddie Mac’s chief economist.
“Over the last few weeks latent demand has been on display with buyers jumping in and out of the market as rates move,” he added.
Mortgage rates rose throughout most of 2022, spurred by the Federal Reserve’s unprecedented campaign of harsh interest rate hikes to tame soaring inflation. But mortgage rates dropped in November and December, following data that showed inflation may have finally reached its peak.
The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit. Many buyers who put down less money upfront or have less-than-perfect credit will pay more than the average rate.
Inflation continues to improve
New inflation data out on Thursday showed that price increases continued to moderate in December. That’s good news for people looking for lower and more stable mortgage rates.
The Mortgage Bankers Association expects mortgage rates to move lower over the course of the year, said Bob Broeksmit, MBA president and CEO, which should bring more homebuyers back into the market.
But in the near term, this see-sawing between 6% and 7% is likely to continue, said George Ratiu, manager of economic research at Realtor.com.
“The Freddie Mac fixed rate for a 30-year loan has been moving up and down in the 6% to 7% range since September 2022 when it crossed the 6% threshold for the first time in 14 years,” Ratiu said. “Mortgage rates have mirrored the volatility in the 10-year Treasury, as investors wrangle mixed expectations amid an inflow of new economic numbers.”
The Fed does not set the interest rates borrowers pay on mortgages directly. But its actions influence them. Mortgage rates tend to track the yield on 10-year US Treasury bonds, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does and investors’ reactions. When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.
All eyes are on the Federal Reserve and its meeting at the end of January and its plans for monetary tightening, with investors and businesses looking for signs that the bank may ease the pace of rate hikes, said Ratiu.
Volatility expected to remain for rates
Home sales fell as rates rose last year. Still-high home prices and interest rates that doubled last year have pushed many people out of the market.
Would-be homebuyers can expect mortgage rates to remain volatile, similar to what we have seen over the past five months, said Ratiu.
That means it will be all the more important for buyers to shop around.
“For buyers who find a home to purchase, shopping for a mortgage with multiple lenders to secure the lowest rate and fees could result not only in a lower monthly payment, but also in tens of thousands of dollars saved over the life of the loan,” said Ratiu.
Mortgage rates have nearly doubled to around 6.5% from the beginning of this year, but they may have not peaked, putting pressure on affordability for most prospective buyers as the Federal Reserve vows to tame inflation.
Following the Fed’s decision to raise interest rates by an additional 75 basis points on Wednesday, the central bank said it will hike rates as high as 4.6% in 2023. Goldman Sachs predicts a 75 bps hike at the November meeting followed by a 50 bps raise in December and a 25 bps increase in January 2023.
Interest rates can move higher as the economy stays firm, Logan Mohtashami, Lead Analyst at HousingWire said. “However, this is all about a tug of war between how long the economy can still be expanding.”
The Fed’s short-term rate does not directly impact long-term mortgage rates but it does steer market activity to create higher rates and reduce demand. Time will tell whether the mortgage market had already priced in expectation of the Fed’s rate hike on Wednesday, but in the months ahead, many industry watchers forecast mortgage rates to continue their climb until the central bank changes its monetary policy.
“Before the Federal Reserve raised the federal funds rate by 0.75 percentage point this week, mortgage rates had already risen by a similar amount,” said Holden Lewis, home and mortgage expert at NerdWallet. “Now the Fed has signaled that it will hike rates several more times this year and next year, so mortgage rates have plenty of room to go up even more.”
“The trickle-down effect of rising borrowing costs means that homebuyers will continue to feel higher monthly payments,” added George Ratiu, manager of economics research at Realtor.com.
With the rate for a 30-year mortgage 300 basis points higher than in 2021, the buyer of a median-priced home this week is facing a monthly payment that is 66% higher than the same week in 2021, Ratiu noted.
Marty Green, principal with mortgage law firm Polunsky Beitel Green, described increasing affordability pressures in the housing market as “throwing cold water on what was a frenzied residential real estate market.”
“Where ‘inventory’ was the big concern in 2021 and early 2022, the concern today is ‘affordability,’ with the combination of substantial price increases and rising rates simply pricing more and more Americans out of the market,” Green said.
The number of existing home sales reflects how the housing sector has been impacted by the Fed’s interest rate policies. Existing home sales declined for seven consecutive months in August, declining 0.4% to a seasonally adjusted annual rate of 4.8 million units last month from July, according to the National Association of Realtors (NAR). Existing home sales are down 19.9% year-over-year.
Although home price growth slowed and demand has weakened, tight supply is keeping prices elevated. The median existing house price increased 7.7% from a year earlier to $389,500 in August. While housing prices typically slow in July and August, they surged to an all-time-high of $413,800 in June.
With the mortgage industry accepting the current rate environment as a “necessary period of adjustment,” lenders are expected to roll out “creative mortgage products” to entice more borrowers, said Kurt Carlton, co-founder and president of real estate investment firm New Western.
“We do not see new construction returning in a meaningful way any time soon. Our macro-outlook is that demand for housing will remain out of balance with supply for the mid to long term,” Carlton said.
According to the NAR, there were 1.28 million existing homes on the market in August and would take 3.2 months to exhaust the current inventory of existing homes at last month’s sales pace. A five-to-seven-month supply is viewed as a healthy balance between supply and demand.
Loan officers get an up-close look at how much shoppers and capital-strapped buyers are getting priced out in the rate-rising environment.
Will Savage, a loan originator at PMC Mortgage, sees many pre-approved clients having to get reapproved for a mortgage based on the rate increases.
With higher monthly mortgage payments, buyers who had money are getting spooked and some those with less financial stability are getting priced out, Savage explained.
“They (buyers with less financial stability) are having to go to surrounding towns instead of where everybody wants to be because they can no longer afford the more desirable locations.”
And for those shoppers who choose to buy, “they may be more likely to select an adjustable-rate mortgage (ARM) because their initial payments will be lower than those they would find with a fixed rate mortgage,” said Michele Raneri, vice president of U.S. research and consulting at TransUnion.
The way ARMs work is lenders offer lower mortgage rates for the initial term, generally three, five, or seven years. After that initial period ends, rates adjust periodically based on a benchmark or index, such as the Secured Overnight Financing Rate (SOFR), based on actual transactions in the Treasury repurchase market.
About 9.1% of total mortgage applications were for ARMs for the week ending Sep. 16, according to the Mortgage Bankers Association (MBA). The volume is slightly lower than in May when it hit a 14-year high of nearly 11% of the overall residential mortgage applications.
While some housing market watchers, including Ratiu, expect that household finances will get squeezed by rising costs and a shortage of homes for sale, some hopeful loan officers see opportunities for buyers as they may be seeing price cuts.
“We are already starting to have sellers realize we had a great run for a couple years and we’re getting more inventory,” said Matt Topping, a senior loan officer at Movement Mortgage.
“Buyers are going to have more choices than they’ve had in the last couple of years. They’re also going to have less competition and I think they’re going to be sellers who are more amenable to things they may have not even considered six months ago, a year ago.”
Interest rates for mortgage loans broke five straight weeks of declines caused by the bank crisis. This week, the 30-year fixed rate rebounded due to recent data indicating a still-resilient economy, the potential continuity of the Federal Reserve’s tightening monetary policy, and pressures in the secondary market.
“For the first time in over a month, mortgage rates moved up due to shifting market expectations,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “Home prices have stabilized somewhat, but with supply tight and rates stuck above 6%, affordable housing continues to be a serious issue for many potential homebuyers. Unless rates drop into the mid-5% range, demand will only modestly recover.”
Freddie Mac’s Primary Mortgage Market Survey (PMMS) shows the 30-year fixed mortgage rate rose to 6.39% as of April 20, up 12 basis points from last week and 128 basis points from an average of 5.11% this time last year. The PMMS focuses on conventional, conforming loans for borrowers who put 20% down and have excellent credit.
At HousingWire’s Mortgage Rates Center, Optimal Blue’s30-year fixed conforming mortgage rate was 6.53% as of April 19, up compared to 6.33% the previous Wednesday. The rate is calculated using actual locked rates with consumers across 42% of all mortgage transactions nationwide.
“Mortgage rates are the product of the larger economic environment, including inflation and employment data as well as banking stability and the Fed’s actions,” Hannah Jones, economic data analyst at Realtor.com, said in a statement. “Recent data points to a still-resilient, though cooling economy, leading many to believe the Fed will elect to raise the target rate at next month’s meeting.”
Mortgage rates are following the gain in the 10-year Treasury, which moved from 3.2% in the first week of April to 3.6% this week, according to George Ratiu, the chief economist at Keeping Current Matters.
“Investors are weighing the softening consumer sector and inflationary pressures, along with the shifts in real estate markets, looking for more clarity on the outlook,” Ratiu said in a statement. “Inflation remains a concern, keeping the Fed in a hawkish position, poised to push the policy rate up by another 25 basis points at its May meeting.”
Logan Mohtashami, the lead analyst at HousingWire, said that the banking stress has “gone away” and the 10-year Treasury yield is now stuck at its technical level between 3.21% and 4.25%.
“We are just in a range with the 10-year yield until something breaks in the economy,” Mohtashami said during an interview.
Pressures from the secondary market
To Melissa Cohn, regional vice president of William Raveis Mortgage, the bank crisis still impacts mortgage rates, mainly through the secondary market.
On April 6, the Federal Deposit Insurance Corporation(FDIC) announced a “gradual and orderly” move to sell a portfolio of $114 billion in mortgage-backed securities (MBS) it retained after seizing control of failed regional banks Signature Bank and Silicon Valley Bank (SVB).
According to Cohn, the fact that MBS portfolios are “being dumped into the system” and the Fed is not acting as a buyer or seller is sending rates in the wrong direction.
“We’ve seen signs of a weakening economy, but we’ve also seen a couple of data points showing stronger than expected data,” Cohn said during an interview. “Combined with the fact that there’s so much mortgage debt being sold onto the market, that’s just pushed rates up.”
Cohn explained that it’s all about supply and demand in the secondary market: “If you have more sellers than you have buyers, then that’s going to push prices down and push yields up basically.”
The spring season
Higher rates in the housing market are reducing hopes for a productive spring season.
“While spring is typically a season marked by a lively housing market, this year is proving to be less energetic than previous ones,” Jones said. “Nevertheless, buyer demand shows signs of improvement with each gain in affordability. However, housing demand remains largely stifled as many buyers wait on the sidelines until the cost of purchasing a home becomes more doable.”
According to Jones, a recent Realtor.com survey showed that 82% of homeowners feel locked in by their current mortgage rate. These borrowers got mortgage loans when rates were 2-3% during the Covid-19 pandemic.
Another challenge to the market is the lack of inventory.
“The lack of housing inventory this spring buying season is also keeping many prospective buyers on the sidelines,” Bob Broeksmit, Mortgage Bankers Association (MBA) president and CEO, said in a statement. “While MBA expects mortgage rates to fall to around 5.5% by the end of this year, more housing supply is needed to improve affordability and meet demand.”
Mortgage rates shot up for the fourth consecutive week, as inflation concerns remain.
The 30-year fixed-rate mortgage averaged 6.65% in the week ending March 2, up from 6.5% the week before, according to data from Freddie Mac released Thursday. A year ago, the 30-year fixed-rate was 3.76%.
Rates had been trending downward after hitting 7.08% in November, but are now climbing again, up about half a percentage point in a month. Robust economic data continues to suggest the Federal Reserve is not done in its battle to cool the US economy and will likely continue hiking its benchmark lending rate.
“As we started the year, the 30-year fixed-rate mortgage decreased with expectations of lower economic growth, inflation and a loosening of monetary policy,” said Sam Khater, Freddie Mac’s chief economist. “However, given sustained economic growth and continued inflation, mortgage rates boomeranged and are inching up toward 7%.”
The lower rates in January brought buyers back into the market, Khater said.
“Now that rates are moving up, affordability is hindered and making it difficult for potential buyers to act, particularly for repeat buyers with existing mortgages at less than half of current rates,” he said.
The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit. Many buyers who put down less money upfront or have less than ideal credit will pay more than the average rate.
Inflation expected to stay elevated longer
The benchmark rate continued to climb, building on the momentum from the past few weeks, as the 10-year Treasury hit 4% this week.
The Fed does not set the interest rates that borrowers pay on mortgages directly, but its actions influence them. Mortgage rates tend to track the yield on 10-year US Treasury bonds, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does and investors’ reactions. When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.
“Investors are expecting inflation to remain elevated for longer, requiring the Federal Reserve to keep increasing its policy rate,” said George Ratiu, Realtor.com senior economist. “The Fed signaled that it sees its monetary tightening having an effect on price growth, but with a strong employment market, wages keep consumers spending.”
Meanwhile, Ratiu said, consumers have taken on a record amount of debt, including mortgage, personal, auto, and student loans.
“The personal savings rate has dropped significantly from the pandemic high, as high prices have been squeezing household budgets,” he said. “With rising interest rates, financial burdens are expected to increase, making consumer choices more difficult in the months ahead.”
Mortgage applications drop on rising rates
The brief boost in mortgage and home buying activity in January as rates dropped has ended, with mortgage applications falling last week to a 28-year low, according to the Mortgage Bankers Association.
“The recent jump in mortgage rates has led to a retreat in purchase applications, with activity down for three straight weeks,” said Bob Broeksmit, MBA’s CEO. “After solid gains in purchase activity to begin 2023, higher rates, ongoing inflationary pressures, and economic volatility are giving some prospective home buyers pause about entering the housing market.”
Rates are trending back up and could even crest 7% again in the next couple of months, said Ratiu.
“For real estate markets, the rise in rates means higher mortgage payments, deepening the affordability challenge just as we move into the crucial spring homebuying season.”
Editor’s Note: Freddie Mac, which has tracked weekly average mortgage rates since 1971 and has periodically made changes to its Primary Mortgage Market Survey, changed the source of its data as of November 17, 2022. Instead of surveying lenders, the weekly results will be based on applications received by lenders that are submitted to Freddie Mac. Find more about Freddie Mac’s change here.
Mortgage rates dropped sharply last week following a series of economic reports that indicated inflation may finally be easing.
The 30-year fixed-rate mortgage averaged 6.61% in the week ending November 17, down from 7.08% the week before, according to Freddie Mac, the largest weekly drop since 1981. A year ago, the 30-year fixed rate stood at 3.10%.
Mortgage rates have risen throughout most of 2022, spurred by the Federal Reserve’s unprecedented campaign of hiking interest rates in order to tame soaring inflation.
In the last week, two key inflation reports – the Consumer Price Index and Producer Price Index – showed that prices rose at a slower pace than expected in October, suggesting inflation is inching in the right direction, and has perhaps even peaked.
“While the decline in mortgage rates is welcome news, there is still a long road ahead for the housing market,” said Sam Khater, Freddie Mac’s chief economist. “Inflation remains elevated, the Federal Reserve is likely to keep interest rates high and consumers will continue to feel the impact.”
The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey only includes borrowers who put 20% down and have excellent credit. But many buyers who put down less money upfront or have less than perfect credit will pay more than the average rate.
Inflation appears to be easing
Investors saw last week’s lower-than-expected CPI data as an indication that the Federal Reserve may make smaller interest rate hikes in the months ahead, said George Ratiu, Realtor.com’s manager of economic research.
While the Fed does not set the interest rates borrowers pay on mortgages directly, its actions influence them. Mortgage rates tend to track the yield on 10-year US Treasury bonds. As investors see or anticipate rate hikes, they make moves which send yields higher and mortgage rates rise.
“The 10-year Treasury dropped from 4.15% last Wednesday to 3.68%, as capital markets seemed to cheer the slowdown in inflation as a sign that the Federal Reserve’s monetary tightening is having its intended effect,” Ratiu said.
Even though inflation data is moving in the right direction, the Fed has said it does not expect to back off of raising rates until inflation gets closer to the desired target of 2%.
Still, the downshift in mortgage rates over the past week has brought a sliver of relief to buyers, said Ratiu.
A buyer purchasing the median-priced home with a 20% down payment at last week’s average rate of 7.08%, was facing a monthly payment of about $2,280, according to Realtor.com. At a rate of 6.61%, the same buyer would see their payment fall to $2,174. While the $100 in savings a month may not seem like much, over the course of a 30-year loan, the buyer would save close to $48,000 in interest.
Those savings spurred some home buyers to sweep in and lock in a lower mortgage rate.
Mortgage applications increased for the first time in seven weeks, according to the Mortgage Bankers Association, with both purchase and refinance applications up.
“Signs of slowing inflation pushed mortgage rates below 7% for the first time since mid-October, but with rates still relatively high and affordability correspondingly reduced, the average loan amount is now at its lowest level in nearly two years,” said Bob Broeksmit, president and CEO of the MBA.
Affordability challenges persist
Affording a home remains a challenge for many home buyers. Mortgage rates are expected to remain volatile for the rest of the year. And prices remain elevated in many areas, especially where there is a very limited inventory of available homes for sale.
Meanwhile, inflation and rising interest rates mean many would-be buyers are also facing tightened budgets.
“For consumers, quickly rising prices have added significant financial pressures, especially as inflation erodes any wage gains,” said Ratiu. “The Fed’s rate hikes are directly tied to higher interest rates for credit cards and car loans, which along with higher mortgage debt, adds additional burdens to household finances.”
More than 20% of listings have seen price cuts, as sellers adjust their strategy to meet buyers in a changing financial landscape, according to Realtor.com.
“On one hand, sellers have been coming to terms with the fact that homes priced for the housing market we experienced when rates were at 3% leave very few buyers able to manage the mortgage payments with today’s rates,” said Ratiu. “On the other hand, buyers may hesitate to move forward with transactions if they find the erratic nature of current mortgage rates disconcerting.”
The volatility in mortgage rates is not expected to let up in the near future, causing uncertainty for both buyers and sellers.
“With inflation still north of 7% and the Fed committed to keep increasing the funds rate over the next few months, the mortgage market is not out of the woods,” said Ratiu. “We may still see rates rebound back above 7% before the end of the year.”