‘One-two punch’: Rising prices and another mortgage rate hike catch homebuyers on the chin
The interest rate on America’s most popular home loan continued to climb this week and is now at a nearly 14-year high, new data shows.
The increase on the 30-year fixed-rate mortgage wasn’t as steep as last week when it spiked more than half a percentage point — but with home prices still surging, every rate hike hurts.
“For buyers of a median-priced home, the one-two punch of record-high prices and rising interest rates has pushed the monthly mortgage payment to about 64% more than last year, tacking on over $800 to the cost of financing,” says George Ratiu, senior economist for Realtor.com.
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30-year fixed-rate mortgages
The average interest rate on a 30-year mortgage rose to 5.81% this week, up from 5.78% a week ago, mortgage finance giant Freddie Mac reported on Thursday. Last year at this time, the 30-year rate was averaging 3.02%.
With rates up more than two percentage points since the start of 2022, home sales have begun to soften.
“The combination of rising rates and high home prices is the likely driver of recent declines in existing home sales,” says Sam Khater, Freddie Mac’s chief economist.
“However, in reality many potential homebuyers are still interested in purchasing a home, keeping the market competitive but leveling off the last two years of red-hot activity.”
Indeed, mortgage applications to purchase homes (as opposed to refinance them) rose for the second straight week, according to the latest survey from the Mortgage Bankers Association.
15-year fixed-rate mortgages
The rate on a 15-year mortgage averaged 4.92% this week, up from 4.81% a week ago, Freddie Mac reports. A year ago at this time, the 15-year rate averaged 2.34%.
Mortgage rates are surging as the Federal Reserve takes aggressive steps to curb skyrocketing inflation.
By hiking the federal funds rate, policymakers are trying to slow the economy — and thus demand for goods — so consumers aren’t paying so much for everything from TVs to TV dinners.
So far, the Fed’s moves are working — at least in the real estate market.
“Many, many indicators suggest that fewer people are visiting homes, the wait time for selling a home is increasing, housing sales are moving down, housing starts are moving down, and overall it’s a slowing in the housing market,” Fed Chair Jerome Powell said during a congressional hearing this week.
“Many forecasts call for the increase in housing prices to slow pretty significantly now.”
5-year adjustable-rate mortgages
The average rate on a 5-year adjustable-rate mortgage, or 5-year ARM, averaged 4.41% this week, up from 4.33% a week ago. Last year at this time, the 5-year ARM averaged 2.53%.
Rates on ARMs adjust in tune with the prime rate. While interest costs start off low, they can increase sharply once that initial fixed-rate period ends.
For some borrowers, ARMs are looking more attractive. These loans can make good financial sense for buyers who might not be planning to own their home long or think they’ll be able to refinance into a longer-term loan with a more desirable rate when the initial term expires.
The share of mortgage applications for ARMs jumped to 10.6%, the Mortgage Bankers Association says in its latest report.
Welcome to the ‘post-pandemic new normal’
Several housing agencies are forecasting that rates will ease to around 5% early next year.
Yet mortgage expert Peter Warden writes that there will need to be “sure signs of inflation cooling” before mortgage rates can fall sustainably.
To be sure, the higher rates are suppressing demand — and the pace of home price growth is slowing as the supply of homes for sale increases.
Prices will continue to adjust as the pool of qualified buyers gets smaller, says Ratiu.
“The silver lining is that housing,” he says, “is clearly transitioning toward a post-pandemic new normal.”
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