Mortgage applications dropped 6.5% last week, and demand reached the lowest point in 22 years, the Mortgage Bankers Association reported Wednesday. The index reflects applications for refinancings and home purchases.

Mortgage applications for a home purchase, a gauge of homebuying, dropped 7% for the week and are now 21% lower than a year ago, the MBA reports. Refinance applications dropped another 6% this week and are 75% lower than the same week a year ago.

Rising mortgage rates have been chipping away at affordability. The average contract interest rate for a 30-year fixed-rate mortgage with a 20% down payment rose to 5.40% compared to 5.22% the previous week, the MBA reports.

Mortgage rates are still low by historical standards. But a year ago, the 30-year fixed-rate mortgage averaged below 3%. Home buyers are also facing higher home prices that are up by double-digit percentages annually.

“The purchase market has suffered from persistently low housing inventory and the jump in mortgage rates over the past two months,” says Joel Kan, an MBA economist. “These worsening affordability challenges have been particularly hard on prospective first-time buyers.”

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The reversal after declines over the last three weeks has economists closely watching for the Fed’s anticipated rate hike next week.

Following three weeks of declines, mortgage rates reversed course and headed back up this week. The 30-year fixed-rate mortgage averaged 5.23% for the week ending June 9; a year ago, it averaged below 3%.

Increased economic activity and incoming inflation data were behind the most recent rate increases this week, says Sam Khater, Freddie Mac’s chief economist. “The housing market is incredibly rate sensitive, so as mortgage rates increase suddenly, demand again is pulling back,” he says. “The material decline in purchase activity combined with the rising supply of homes for sale will cause a deceleration in price growth to more normal levels, providing some relief for buyers still interested in purchasing a home.”

Fed’s Anticipated Rate Hike Looms

Economists will watch the Federal Reserve’s actions closely this coming week. The central bank is largely expected to raise its key benchmark rate at its next meeting, June 14-15.

“Ahead of May’s inflation reading, investors are concerned about inflation and the impact of an upcoming half-percentage point rate hike from the Federal Reserve next week,” Nadia Evangelou, senior economist and director of forecasting for the National Association of REALTORS®, writes on the association’s blog. However, “the upcoming rate hike will likely have a smaller impact on mortgage rates this time.”

In March, when the Federal Reserve raised its short-term interest rates, mortgage rates surged 80 basis points in the following three weeks, Evangelou notes. The 30-year fixed-rate mortgage jumped from 3.85% to 4.67% by the end of March. In May, when the Federal Reserve raised its interest rates even more aggressively, mortgage rates rose by less than 20 basis points. By the end of May, the 30-year fixed-rate mortgage averaged 5.10%.

“It seems that mortgage rates have already priced in some of the effects of the upcoming Fed’s rate hikes,” Evangelou explains. She is forecasting mortgage rates to average 5.6% to 5.7% by late 2022.

Snapshot of Mortgage Rates

Freddie Mac reports the following national averages with mortgage rates for the week ending June 9:

• 30-year fixed-rate mortgages: averaged 5.23%, with an average 0.9 point, increasing from last week’s 5.09% average. Last year at this time, 30-year rates averaged 2.96%.
• 15-year fixed-rate mortgages: averaged 4.38%, with an average 0.8 point, rising slightly from last week’s 4.32% average. A year ago, 15-year rates averaged 2.23%.
• 5-year hybrid adjustable-rate mortgages: averaged 4.12%, with an average 0.3 point, increasing from last week’s 4.04% average. A year ago, 5-year ARMs averaged 2.55%.

Freddie Mac reports commitment rates along with average points to better reflect the total upfront cost of obtaining the mortgage.

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Reprinted with permission

The Federal Reserve’s move to raise its benchmark rate by three-quarters of a percentage point—the largest increase since 1994—could put more upward pressure on near-6% mortgage rates and sideline more home buyers, says NAR Chief Economist Lawrence Yun.

The Federal Reserve unleashed another hike to its short-term benchmark rate Wednesday. The increase, the Fed’s largest since 1994, likely will have an impact on the housing market, economists say. The Fed’s key rate often influences mortgage rates, though it doesn’t directly affect them. Rates are moving at a much faster clip than most housing analysts forecast.

On Wednesday, the central bank’s Federal Open Market Committee voted to increase its benchmark funds rate by three-quarters of a percentage point to help tame inflation, which is at a 40-year high. Banks use the Fed’s rate as a benchmark for what they charge one another for short-term borrowing. The Fed’s latest hike sets a “big increase in interest rates and means several more rounds of rate hikes are on the way in upcoming months,” says Lawrence Yun, chief economist of the National Association of REALTORS®.

So far this year, the short-term Fed funds rate has jumped by 175 basis points. The 30-year fixed-rate mortgage has jumped even more—by nearly 300 basis points. For a $300,000 mortgage, the monthly payment has increased from $1,265 in December to $1,800 today, Yun says.

“That’s painful and, consequently, will shrink the buyer pool,” Yun says. “Home sales have recently been trending down toward 2019 figures. Sales could fall even further, with some inventory sitting on the market for more than a month like in pre-pandemic days. Pricing a listed home properly will, therefore, be the key to attracting buyers.” Mortgage rates will stabilize when consumer price inflation starts to fall, Yun adds.

Rising Mortgage Rates

Last week, the 30-year fixed-rate mortgage averaged 5.23%, according to Freddie Mac. A year ago, rates averaged 2.96%. By some measures, mortgage rates were just shy of 6%—at 5.99%—on Wednesday, according to Bankrate.com’s national survey. “Consumers haven’t seen mortgage rates above 6% since 2008,” Greg Schwartz, CEO and founder of mortgage lender Tomo, told Bankrate.com. “The pace of this move is what’s most concerning, as consumers’ buying power evaporated quicker than any time in recent memory. Further, volatility in rates may not decrease anytime soon either.”

Ali Wolf, chief economist at Zonda, offers an example of the impact: Affording a $316,000 home with a mortgage rate of 6% is about equal to paying for a $450,000 home with a 3% rate.

More aspiring home buyers are getting priced out. In response, mortgage applications, a gauge of homebuying demand, have been falling by double-digits. “Mortgage rates going forward will continue to be responsive to changes in expectations around the Fed’s policy path as well as inflation expectations,” says Ruben Gonzalez, chief economist for Keller Williams. “The housing market is still extremely tight, with inventory levels remaining near historic lows, leaving room for the market to absorb falling demand.”

The Fed committee hopes its more aggressive approach will help lessen inflation. “Clearly, today’s 75-basis-point increase is an unusually large one, and I do not expect moves of this size to be common,” Fed Chairman Jerome Powell said at a news conference Wednesday. Still, Powell said he expected the Fed’s July meeting to see another increase of 50 or 75 basis points, but he said decisions will be made “meeting by meeting.”

Nevertheless, the committee still appeared optimistic about the economy. “Overall economic activity appears to have picked up after edging down in the first quarter,” the committee said in a statement. “Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply-and-demand imbalances related to the pandemic, higher energy prices and broader price pressures.” The committee is forecasting inflation to move significantly lower in 2023.

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Borrowing costs have climbed to their highest level since 2008, sending shock waves through the housing market.

Mortgage rates have climbed to their highest level since 2008, pinching home buyers’ budgets. The 30-year fixed-rate mortgage averaged 5.78% this week, way above its 2.93% average just one year ago, Freddie Mac reports. The Federal Reserve’s decision Wednesday to raise its key benchmark rate by the highest amount in 28 years sent shock waves through financial markets, including adding further pressure on mortgage rates.

“These rising mortgage rates hurt affordability and decrease the purchasing power of many buyers,” Nadia Evangelou, senior economist and director of forecasting at the National Association of REALTORS®, wrote on the association’s blog. “In addition to increasing the amount buyers will pay to borrow for their mortgage, higher interest rates lower their purchasing power since a larger portion of their monthly payment will be put toward interest.”

This means more buyers must readjust their home-shopping budgets, as the impact of higher rates translates to a 25% drop in house hunters’ purchasing power since the beginning of the year. For example, a typical buyer could afford a $360,000 home with a $1,400 monthly mortgage payment at the beginning of the year. Now, with near-6% mortgage rates, a $1,400 monthly payment translates to a $270,000 home.

Where Do Rates Go From Here?

This week’s 5.78% average for the 30-year fixed-rate mortgage is up from 5.23% last week. Every bit of that bump is being felt by home buyers, economists say. For example, a $300,000 loan with a rate of 5.23% would cost a borrower about $1,653 per month (excluding taxes and insurance). That same loan at this week’s 5.78% average would cost $1,756—an extra $1,236 a year, says Jacob Channel, LendingTree’s senior economist.

The latest increase in mortgage rates has largely been attributed to the Fed’s hike of 75 basis points to its key benchmark rate. “It’s possible that this large increase could be somewhat of an over-correction on the part of lenders, and, as a result, it may fall somewhat over the coming weeks as lenders better adjust to the current high-inflation environment,” Channel says. “Mortgage rates have already risen considerably higher and faster than what most predicted they would at the start of the year—and, as evidenced by today’s latest figures, lenders have shown a willingness to continue to raise rates, even as homebuyer demand falls.”

Mortgage applications for home purchases—viewed as a gauge of future homebuying activity—are down 16% year over year, according to the Mortgage Bankers Association.

Hikes Across the Board

Freddie Mac reports the following national averages for mortgage rates for the week ending June 16:

• 30-year fixed-rate mortgages: averaged 5.78%, with an average 0.9 point, rising from last week’s 5.23% average. A year ago, 30-year rates averaged 2.93%.
• 15-year fixed-rate mortgages: averaged 4.81%, with an average 0.9 point, increasing from last week’s 4.38% average. A year ago, 15-year rates averaged 2.24%.
• 5-year hybrid adjustable-rate mortgages: averaged 4.33%, with an average 0.3 point, rising from last week’s 4.12% average. A. year ago, 5-year ARMs averaged 2.52%.

Freddie Mac reports commitment rates along with average points to better reflect the total upfront cost of obtaining a mortgage.

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Reprinted with permission