The US housing market struggles as high mortgage rates continue to stifle potential homebuyers and homeowners looking to refinance. According to several sources, the average 30-year fixed-rate mortgage has rebounded this week, approaching the highest level of 2023, making it the roughest month for homebuyers this year. This surge in rates, coupled with decreased housing inventory, has dampened activity in the housing sector, leaving many buyers on the sidelines.
The Federal Reserve’s efforts to combat inflation have led to a consistent increase in interest rates since early last year. The current benchmark interest rate is between 5.25% and 5.50%, the highest level in 22 years. While inflation has receded somewhat since the previous year, high mortgage rates remain a significant barrier for Americans hoping to enter or upgrade in the housing market. The cost of borrowing has surged, limiting buyers’ purchasing power in an already unaffordable market for many.
According to Freddie Mac, the 30-year fixed-rate mortgage averaged 6.81 percent as of July 27, 2023, up from last week when it averaged 6.78 percent. A year ago at this time, the 30-year FRM averaged 5.30 percent. In the meantime, 15-year fixed-rate mortgage averaged 6.11 percent, up from last week when it averaged 6.06 percent. A year ago at this time, the 15-year FRM averaged 4.58 percent.
Sources: Bloomberg, Freddie Mac
However, as noted by MortgageNewsDaily, “Freddie’s weekly rate number is a lagging indicator. It presents a 5 day average through Wednesday and doesn’t report it until Thursday.” Since Wedesday, mortgage rates have risen a bit, reflecting both better US economic figures (Q2 GDP, June Durable Goods Orders, Initial Jobless Claims) and a tighter monetary policy in Japan. In a context where Japanese long term yields rise, Japanese investors (largest foreign holders of US Treasuries) will have less appetite for US bonds, resulting in a spike of US long term yields and therefore mortgage rates.
According to data from both MortgageNewsDaily and Bankrate.com, the 30-Year Fixed-Rate Mortgage was above 7% on Friday. Comparing the rates from two years ago, the average rate on a 30-year mortgage has more than doubled. This sharp increase has led to a scarcity of available homes as homeowners with lower borrowing costs from the past are hesitant to sell and face higher rates on new properties. Consequently, the lack of housing supply has contributed to a sharp decline in home sales over the past six months.
Sources: Bloomberg, Bankrate.com
The struggle in the housing market is further evident in the weekly Mortgage Bankers Association’s survey. The report shows that mortgage applications decreased by 1.8% from the previous week, with the Refinance Index dropping 0.4% and the Purchase Index falling by 2.5%. Mortgage purchase applications were down 6.5% over the past four weeks. High rates and dwindling housing inventory are the primary culprits behind this decline, causing many potential buyers to postpone their home search.
Sources: Bloomberg, MBA
In conclusion, the surge in mortgage rates has presented significant challenges for the US housing market, causing a decline in home sales and limiting potential buyers’ purchasing power. However, the possibility of a pause in the rate hike cycle offers a ray of hope for the market’s recovery, potentially leading to increased mortgage applications. As we reflect on these developments, it becomes evident that housing affordability and market stability are crucial factors that require careful attention and consideration from policymakers and industry stakeholders alike.