Mortgage rates tick higher again as recession fears loom
The 30-year fixed-rate mortgage averaged 5.54% in the week ending July 21, up from 5.51% the week before, according to Freddie Mac. That is significantly higher than this time last year when it was 2.78%.
“The housing market remains sluggish as mortgage rates inch up for a second consecutive week,” said Sam Khater, Freddie Mac’s chief economist. “Consumer concerns about rising rates, inflation and a potential recession are manifesting in softening demand. As a result of these factors, we expect house price appreciation to moderate noticeably.”
Higher rates have put a dent in mortgage demand, as loan applications dropped to the lowest level in 22 years, according to the Mortgage Bankers Association.
“The weakening economic outlook, high inflation, and persistent affordability challenges are impacting buyer demand,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting.
All eyes on the Fed
The Federal Reserve does not set the interest rates borrowers pay on mortgages directly. Rates tend to track 10-year US Treasury bonds. But mortgage rates are indirectly impacted by the Fed’s actions on inflation. As investors see or anticipate rate hikes, they often sell government bonds, which sends yields higher and with it, mortgage rates.
As a result, the spread between the 2-year and 10-year Treasuries moved even deeper into negative territory this week.
Buyers hitting ‘affordability ceiling’
For prospective buyers, steep price gains and higher mortgage rates have created an affordability ceiling, said Ratiu.
“Many Americans are finding they no longer have enough money to purchase a home that meets their needs,” he said.
A year ago, a buyer who put 20% down on a median priced $390,000 home and financed the rest with a 30-year, fixed-rate mortgage at an average rate of 2.78% had a monthly mortgage payment of $1,279, according to calculations from Freddie Mac.
Today, a homeowner buying the same priced house with an average rate of 5.54% would pay $1,779 a month in principal and interest. That’s $500 more each month.
The increase in finance costs mean fewer homes are available to entry-level buyers. A household earning $75,000 per year can only afford 23% of active listings on Realtor.com, according to the home search site.
“People who cannot afford to buy a home are not finding much reprieve in the rental market,” said Ratiu. “Looking to the next few months, it’s becoming increasingly clear that real estate markets are headed for a correction.”