U.S. mortgage rates fell this week as inflation finally started to moderate, a new report shows.
The decline in the 30-year fixed-rate mortgage, which briefly dipped below 5% earlier this month, is giving home shoppers a bit of relief, as borrowing costs have been on an upward swing since bottoming out at the start of 2021.
Still, mortgage rates are up more than 2 percentage points from last year at this time, and the average monthly payment on a 30-year loan is up around $700, notes Len Kiefer, deputy chief economist at the housing finance giant Freddie Mac.
Understandably, home showings are down and more buyers are backing out of deals, says Washington D.C. real estate agent Corey Burr.
“The shocking interest rate increases in the first seven months of 2022 have had a major effect on the residential real estate market as buyers wrestle between buying at a time with high prices and relatively high interest rates versus continuing to rent,” Burr says.
30-year fixed-rate mortgages
The 30-year fixed-rate mortgage this week averaged 5.13%, down from 5.22% last week, Freddie Mac reported on Thursday. A year ago at this time, the 30-year rate was averaging 2.86%.
Mortgage rates have been on a roller coaster this year as the Federal Reserve battles soaring inflation.
The central bank has raised its benchmark interest rate four times in 2022 to help cool the overheated economy and tamp down prices on food, energy and housing.
While mortgage rates aren’t directly tied to the Fed’s rate, they are influenced by it.
“Inflation appears to be beyond its peak, which has stopped the rapid increase in mortgage rates that the housing market was experiencing earlier this year,” says Sam Khater, Freddie Mac’s chief economist.
15-year fixed-rate mortgages
The average rate on a 15-year mortgage is now 4.55%, down from a week ago when it was 4.59%, Freddie Mac says. Last year at this time, the 15-year rate was just 2.16%.
With rates still bouncing around, many homeowners are putting off plans to list their properties. As a result, new listings are slowing.
“Many homeowners are pulling back from selling their homes, concerned about missing the pricing peak, especially as the share of listed homes with price reductions gains ground,” writes George Ratiu, senior economist for Realtor.com.
5-year adjustable-rate mortgage
The typical rate on a five-year adjustable-rate mortgage — also called a five-year ARM — averaged 4.39% this week, down from 4.43% last week. One year ago, the 5-year ARM averaged 2.43%.
Rates on adjustable mortgages start off lower and then move up or down based on the prime rate.
With a 5/1 ARM, the interest rate is set for the first five years, and then it adjusts annually over the remaining course of the loan.
If rates were to fall after an ARM’s initial period, a borrower could potentially refinance into a lower rate at a longer term. But there’s also the risk that rates go higher.
Why demand is ‘rapidly drying up’
Even though rates fell this week and have dipped periodically in recent months, buyers are calling off purchase agreements at a rate not seen in over two years, according to a new report from Redfin.
About 63,000 home sales contracts fell through in July, the real estate brokerage says. That’s 16% of the homes that went under contract and the highest percentage on record, except for March and April 2020 when the pandemic was just starting.
Homes are sitting on the market longer, giving buyers room to negotiate. But some are nervous about buying because they’re afraid of a recession that could cause home prices to fall.
“They don’t want to end up in a situation where they purchase a home and it’s worth $200,000 less in two years, so some are opting to wait in hopes of buying when prices are lower,” says Heather Kruayai, a Redfin real estate agent in Jacksonville, Fla.
Mortgage applications take a dive
In another sign of the struggling market, mortgage applications fell over 2% to their lowest level since 2000, the Mortgage Bankers Association (MBA) reported this week.
“Home purchase applications continued to be held down by rapidly drying-up demand, as high mortgage rates, challenging affordability and a gloomier outlook of the economy kept buyers on the sidelines,” says Joel Kan, the MBA’s associate vice president of economic and industry forecasting.
If home price growth continues to slow and rates don’t spike again, more buyers could return to the market later in the year.
“The savviest buyers will understand that this environment will present certain opportunities that did not exist over the past two and a quarter years when the market was a white-hot seller’s market,” says Burr, an agent with Sotheby’s International Realty.
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