Mortgage rates just dropped and home prices may be 'peaking' — but buyers hoping for a free fall 'will be disappointed'

Mortgage rates just dropped and home prices may be 'peaking' — but buyers hoping for a free fall 'will be disappointed'

Mortgage rates just dropped and home prices may be ‘peaking’ — but buyers hoping for a free fall ‘will be disappointed’

After climbing above 7% for the first time in 20 years, U.S. mortgage rates edged back down this week, even as the housing market continues to be rattled by high borrowing costs.

Interest rates also edged lower, although the Federal Reserve announced another three-quarters of a percentage point increase in the benchmark federal funds rate, a sign that inflation still refuses to be tamed.

“(Mortgage) rates appear to have already priced in some of the effects of higher Fed rates,” says Nadia Evangelousenior economist at the National Association of Realtors.

Still, depending on how quickly—or slowly—consumer prices and the still frothy labor market begin to slow, mortgage rates may soon begin to rise again.

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30 year fixed rate mortgages

The interest rate on a 30-year fixed mortgage — America’s most popular home loan — averaged 6.95 percent this week, down from 7.08 percent a week earlier, the housing finance giant Freddie Mac announced Thursday.

Last year at this time, the 30-year rate averaged 3.09%.

At today’s rate (and prices), the monthly mortgage payment on a median-priced home is $965 higher than it was a year ago, says George Ratiusenior economist for Realtor.com.

“The dramatic jump in financing costs has effectively squeezed most buyers’ budgets,” says Ratiu.

15-year fixed-rate mortgages

The rate of a 15 year fixed mortgage averaged 6.29% this week, down from 6.36% last week and 2.35% a year ago, Freddie Mac says.

Sales are still falling and prices in many markets are following suit.

Median home prices fell in more than a third of the 100 largest U.S. housing markets, according to research from Florida Atlantic University (FAU) and Florida International University.

The markets with the highest declines are mostly in places that have seen the strongest appreciation: San Jose, California, Austin, Texas, San Francisco, Boise, Idaho. and Salt Lake City.

“Housing markets across the country are definitely slowing and seem to be reaching the highs of current housing cycles,” said Ken H. Johnson, an economist at FAU’s College of Business.

5 year variable rate mortgage

The average interest rate on a five-year adjustable-rate mortgage — or ARM — was 5.96 percent this week, down slightly from 5.96 percent last week.

Last year at this time, five-year ARMs averaged 2.54%.

ARMs start with fixed interest rates that typically last between three and 10 years. Interest rates are usually lower than those on a mortgage that is fixed for a longer term, such as a 15- or 30-year term.

But after the initial term, the ARM rate will adjust up or down based on a benchmark like prime rate.

Read more: Should I wait for housing to collapse further before buying a house? 3 reasons why late 2022 might be the best time to get involved

The Fed’s Impact on Mortgage Rates

The Federal Reserve doesn’t set mortgage rates, but its federal funds rate affects a number of borrowing costs, including home loans.

The Fed’s recent rate hikes have affected demand in a variety of sectors, but perhaps none more so than housing.

“The housing market was very overheated for several years after the pandemic as demand increased and interest rates were low,” Fed Chair Jerome Powell expressed at a press conference this week. “The housing market needs to return to balance between supply and demand.”

Powell said that from a financial stability perspective, however, the market appears to be in better shape now than it was in the run-up to the global financial crisis, when lending standards were much looser than they are today.

“It’s a very different situation and it doesn’t appear to be a financial stability problem,” he said.

Where will rates go from here?

Mortgage rates could rise to 8% or more by the end of this year or early next if inflation proves stubborn, said Lisa Sturtevant, chief economist at Bright MLS.

The latest consumer price data will be released next week – and that could be indicative of the Fed’s future actions.

“While rates may be volatile in the coming weeks, homebuyers expecting mortgage rates to drop significantly will be disappointed,” says Sturtevant.

If inflation eases and the Federal Reserve relaxes its aggressive hikes, mortgage rates could stabilize around 7%, she says.

The last one Mortgage Bankers Association forecast (MBA) shows average 30-year fixed rates peaking in the last quarter of this year and then declining in 2023.

Mortgage applications fell for the sixth week in a row

The decline in mortgage activity continued last week, falling 0.5% from the previous week, according to the latest MBA study.

Specifically, applications for mortgages to buy homes were down 1% from the previous week and down 41% from last year. Applications to refinance existing home loans are down 0.2% and as much as 85% from a year ago.

“Except for the ARM loan rate, interest rates for all other types of loans were more than three percentage points higher than they were a year ago,” said Joel Kahn, MBA vice president and deputy chief economist.

“These elevated interest rates continue to put pressure on both purchasing and refinancing activity and add to the ongoing affordability challenges impacting the broader housing market, as evidenced by deteriorating trends in housing starts and home sales.”

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

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