March 21, 2023

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Homebuyers don’t buy and homebuilders don’t build in the face of wild mortgage rates

Homebuyers don't buy and homebuilders don't build in the face of wild mortgage rates

‘Unhealthy and unsustainable’: Homebuyers don’t buy and homebuilders don’t build in the face of runaway mortgage rates.

US mortgage rates rose again this week as demand for housing loans slumped, according to two widely followed reports.

Buyers and sellers are increasingly on edge as the average 30-year fixed-rate mortgage rate – now more than double what it was at the start of the year – approaches 7%.

Homebuilders are also losing confidence in the housing market amid rising prices, which one industry leader describes as “unhealthy and unsustainable.”

“High mortgage rates near 7% have significantly dampened demand, particularly for potential first generation and first generation homebuyers,” said Jerry Konter, president of the National Association of Home Builders, He said this week.

“Policymakers must address the deepening housing affordability crisis.”

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30-year fixed-rate mortgage

The average 30-year fixed-rate mortgage rate is 6.94% this week, up from 6.92% a week ago, mortgage giant Freddie Mac. I mentioned on Thursday. A year ago at this time, the 30-year average was 3.09%.

While the recent rate hike has been more moderate than in previous weeks, borrowing costs are still at a 20-year high and getting worse.

“30-year fixed-rate mortgages are still shy of 7% and negatively impacting the housing market in the form of lower demand,” says Sam Khater, chief economist at Freddie Mac.

“Plus, home builders’ confidence is down to half of what it was just six months ago, and construction, particularly single-family residential construction, continues to slow.”

15 Years Fixed Return Mortgages

Freddie Mac says the 15-year fixed-rate mortgage rate is on average 6.23%, up from 6.09% last week. A year ago at this time, the 15-year rate was 2.33% on average.

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Since then, buyers have lost significant purchasing power – and many have had to adjust their budgets or put their searches on hold.

Faced with fewer buyers, sellers are no longer able to call all the shots.

“Among recently sold properties that have been on the market for more than a month, sellers have had to cut prices by an average of 12%,” Says Nadia Evangelo, chief economist at the National Association of Realtors.

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5 year adjustable mortgage

The increasingly popular five-year adjustable rate mortgage (ARM) averaged 5.71% this week, down from 5.81% the previous week.

A year ago at this time, these adjustable rate mortgages averaged 2.54%.

A lower interest rate this week is likely to increase demand for five-year ARM, which comes at a fixed rate for the first five years and then adjusts up or down based on a criterion like interest rate.

Buyers have been harvesting adjustable-rate mortgages at a rate not seen since the Great Recession, betting they’ll have a chance to refinance into a lower-fixed-rate mortgage before adjusting their ARM.

Mortgage rates could be in the ‘new normal’

Rates have been steadily increasing this year amid Actions Taken by the Federal Reserve To curb high inflation for decades – despite the pain it causes consumers.

Today’s rates can be considered “new normal,” Evangelo says.

She notes that rates of 7% were typical in the mid-1990s and late 2000s. However, home ownership at that time was higher than it is now.

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“Potential buyers today also have to deal with rising inflation,” Evangelo says. While inflation is outpacing wage growth, the typical household needs to expand its budget and spend more than 25% of its income on mortgage payments.

“Including other expenses such as mortgage and home insurance, taxes and property maintenance expenses, home purchase costs exceed 30% of a typical household income.”

Mortgage applications this week

Mortgage applications fell 4.5% on a weekly basis, according to the latest reports Report From the Mortgage Bankers Association (MBA).

“The speed and level at which prices have risen this year has greatly reduced refinancing activity, and exacerbated existing affordability challenges in the buying market,” says Joel Kahn, Vice President of MBAs and Deputy Chief Economist.

“Residential housing activity ranging from housing starts to home sales has been on downtrends concurrent with price increases.”

Existing loan refinancing requests are down 7% from the previous week and were 86% lower than a year ago. Refinancing’s share of mortgage activity fell to 28.3%, down from 29% in the previous week.

Mortgage applications for home purchases are down 4% this week – and were 38% lower than the same week a year ago.

“With these high rates, ARM’s share has risen to 12.8% of all applications, the highest share since March 2008,” Kahn says.

“ARM loans remain a viable option for borrowers who are still trying to find ways to lower their monthly payments.”

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