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Inflation hit house prices significantly and mortgage rates continued to increase, rising 7% for the sixth consecutive week.
For the week of September 29, the 30-year mortgage was at 6.70%, up 6.29% from the previous week.
Mortgage rates are at their highest since July 2007.
Inflation has risen since the start of this year, driving down Federal Reserve borrowing costs.
As a result, mortgage rates more than doubled. The central bank’s campaign and efforts to curb inflation have raised investor concerns about runaway bond markets.
“The uncertainty and volatility in financial markets is heavily impacting mortgage rates,” said Sam Khater, chief economist at Freddi Mac.
According to Freddie Mac, the average mortgage rate is based on a study of conventional mortgages to purchase homes for borrowers with excellent credit and a 20% down payment.
Why are interest rates rising at such a furious pace?
The Federal Reserve’s aggressive rate hikes are producing the results needed to reduce demand, especially in the real estate sector.
Rising interest rates pushed house prices down, leading to lower sales.
However, there is still a shortage of homes for sale, which keeps prices high.
According to Bob Broeksmit, president and CEO of the Mortgage Bankers Association, the Fed’s efforts to rein in inflation have had a major impact on the mortgage market.
“Mortgage rates have increased more than a percentage point in the past six week,” said Broeksmit.
“Refinance and purchase applications continue to decrease on both a weekly and annual basis.”
Realtor.com executive and economist George Ratiu said rates should continue to rise, saying:
“While even two months ago rates above 7% may have seemed unthinkable, at the current pace, we can expect rates to surpass that level in the next three months.”
Although the Fed does not directly set the interest rates that borrowers pay on mortgages, its actions do have an impact.
Mortgage rates, for example, are generally based on the yield on US 10-year Treasury bills.
When investors see or expect interest rate hikes, they sell government bonds, leading to higher yields and higher mortgage rates.
Ten-year government bond yields hit 4% this week, a level last seen in 2008.
According to Ratiu, financial market volatility is an indicator of uncertainty driven by solid economic activity and expectations of a slowdown in 2023.
“The main concern is Americans’ ability to weather 40-year high inflation, which is shrinking paychecks amid sharp rent increases and still-rising home prices, not to mention high interest rates, which are curbing households’ ability to borrow,” said Ratiu.
Deterioration of affordability
Would-be buyers are grappling with the most unaffordable housing market in nearly four decades, driven by stubbornly high house prices, rising interest rates and falling wage values.
According to a calculation by Freddie Mac, buyers who paid 20% for a $390,000 home in 2021 and financed the rest with a 30-year fixed rate mortgage at an average interest rate of 3.01% had a monthly mortgage payment of $1,317.
Today, homeowners paying the same house at 6.70% interest would pay $2,013 per month in principal and interest, or $696 more per month.
According to Realtor.com, mortgage rates have risen sharply this year, costing typical home buyers $107,000 in buying power.
Households earning the median income with a 20% down payment could afford homes that were priced at $448,700 at the start of the year when interest rates were 3.1%.
According to data from Realtor.com, the same household can only buy a $341,700 home with interest rates as high as 7%.
“The huge surge in mortgage rates over the last nine months have squashed many buyers’ budgets, leading to a significant pullback in transactions,” said Ratiu.