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Home buyers don't buy and home builders don't build in the face of untamed mortgage rates

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‘Unhealthy and unsustainable’: Homebuyers don’t buy and homebuilders don’t build in the face of untamed mortgage rates

U.S. mortgage rates rose once again this week as demand for home loans plummeted, according to a pair of widely followed reports.

Buyers and sellers are increasingly nervous as the average 30-year fixed mortgage rate (now more than double what it was at the beginning of the year) approaches 7%.

Home builders are also losing confidence in the housing market due to rising rates, which one industry leader called “unhealthy and unsustainable.”

“High mortgage rates approaching 7% have significantly weakened demand, especially for first and first generation prospective home buyers,” Jerry Konter, president of the National Association of Home Builders, said in a statement this week.

“Policymakers must address this worsening housing affordability crisis.”

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30-year fixed rate mortgage

The average rate on a 30-year fixed mortgage has reached 6.94% this week, up from 6.92% a week ago, mortgage finance giant Freddie Mac reported on Thursday. A year ago at present, the 30-year rate was 3.09% on average.

Although the latest rate hike has been more moderate than in previous weeks, borrowing costs are still at a 20-year high and worsening.

“The 30-year fixed-rate mortgage remains just shy of 7%, negatively impacting the housing market in the form of decreased demand,” says Sam Khater, chief economist at Freddie Mac.

“Moreover, home builders’ confidence has dropped to half what it was just six months ago, and construction, particularly single-family residential construction, continues to slow.”

15-year fixed rate mortgage

Freddie Mac, the 15-year fixed mortgage rate rose to 6.23% from 6.09% last week. At this time a year ago, the 15-year rate was 2.33% on average.

Since then, buyers have lost significant purchasing power, and many have had to adjust their budgets or suspend their searches.

Faced with fewer buyers, sellers can no longer do all the shots.

“Among recently sold properties that have been on the market for more than a month, sellers have had to reduce prices by an average of 12%,” says Nadia Evangelou, senior economist at the National Association of Realtors.

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5-year adjustable rate mortgage

The increasingly popular five-year adjustable-rate mortgage (ARM) has dropped to 5.71% this week from 5.81% a week ago.

At this time a year ago, these adjustable mortgages averaged 2.54%.

This week’s rate cut is likely to further boost demand for five-year ARMs, which come at a flat rate for the first five years and then adjust up or down based on criteria such as the prime rate.

Buyers are taking adjustable-rate mortgages at a rate not seen since the Great Recession, betting they’ll have the opportunity to refinance with a lower, fixed-rate mortgage before adjusting ARMs.

Mortgage rates could be the ‘new normal’

Despite the pain it inflicts on consumers, interest rates have been rising steadily this year amid the Federal Reserve’s actions to curb inflation, which has been high for decades.

Evangelou says today’s odds can be considered the “new normal.”

He points out that 7% rates were typical in the mid to late 1990s and early 2000s. But back then home ownership was higher than it is now.

“Today’s potential buyers also have to deal with higher inflation,” Evangelou says. “As inflation outstrips wage growth, a typical family needs to expand its budget and spend more than 25% of its income on mortgage payments.

“The costs of buying a home, including mortgage insurance, home insurance, taxes and other expenses such as expenses for property maintenance, exceed 30% of a typical family’s income.”

Mortgage applications this week

Mortgage applications fell 4.5% week-on-week, according to the latest report from the Mortgage Bankers Association (MBA).

“The pace and level at which rates have climbed this year has greatly reduced refinancing activity and exacerbated existing affordability challenges in the purchasing market,” says Joel Kan, MBA’s vice president and chief economist.

“Housing activity, from home starts to home sales, is trending downwards in line with the rise in rates.”

Applications to refinance existing loans were down 7% from a week ago and 86% lower than last year. Ref share of mortgage activity fell to 28.3% from 29% in the previous week.

Mortgage applications to buy a home are down 4% this week and 38% lower than the same week a year ago.

“With these high rates, the ARM share rose to 12.8% of all apps, the highest share since March 2008,” says Kan.

“ARM loans remain a viable option for borrowers who are still trying to find ways to reduce their monthly payments.”

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This article provides information only and should not be construed as advice. It is provided without any warranty.

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