Mortgage rates are soaring, and home buyers are paying the price.
The 30-year fixed-rate mortgage averaged 6.29% in the week ended Sept. 22, according to Freddie Mac, an almost-14-year high. The rate rose from 6.02% a week ago and was up from 2.88% a year ago.
“The housing market continues to face headwinds, as mortgage rates increase again this week,” said Sam Khater, Freddie Mac’s chief economist.
“Impacted by higher rates, house prices are softening, and home sales have decreased. However, the number of homes for sale remains well below normal levels.”
The mortgage-rate increase is hitting home buyers right in the pocket book. Those with a $3,000 monthly budget can afford a $479,750 home at 6% mortgage rates, down from a $621,000 home a year ago, when 3% mortgage rates prevailed, according to real estate brokerage Redfin.
“Put another way, this homebuyer has lost $140,000 in spending power this year as mortgage rates have doubled,” Redfin said.
Fed Rate Hikes
Mortgage rates have climbed since January, particularly as the Federal Reserve has raised interest rates over the past six months. The Fed lifted the federal funds target rate by 75 basis points to 3-3.25% Wednesday. The central bank is expected to move again in November and December.
High mortgage rates are keeping both buyers and sellers on the sidelines, Redfin said. Buyers are reluctant because they can’t afford high home prices and high mortgage rates.
“Sellers, hesitant to list their homes into an environment with diminished demand, are also motivated to stay put because they don’t want to give up their own relatively low mortgage rates,” Redfin said.
“Raising interest rates is necessary to fight inflation, but it comes with some painful side effects–especially for homebuyers,” said Redfin economist Chen Zhao.
With the Fed almost certain to boost rates further, mortgage rates are likely to ascend too, making homes even less affordable. Perhaps that will push sellers to lower their prices. In the meantime, if your choice is between renting and buying, it may pay to rent.
More Ill Tidings
In other bad housing news, existing-home sales fell for the seventh straight month in August, dropping 0.4% from July and 19.9% from a year earlier, according to the National Association of Realtors (NAR). The annualized sales pace was the lowest since May 2020, early in the pandemic.
The median existing-home sales price dropped for the second month in a row – to $389,500 in August, down 3.5% from $403,800 in July. The price hit a record peak of $413,800 in June.
To be sure, the latest number still represents a 7.7% increase from $361,500 in August 2021, indicating home prices may still be unaffordable for most Americans.