Mortgage Rates Flirt With 7% As Loan Applications Slump
Mortgage rates moved closer to 7% this week amidst a perfect storm of recession fears, stubborn inflation and the hint of more Federal Reserve interest rate hikes, further dampening housing market outlooks for at least the near future.
The average 30-year, fixed-rate mortgage inched up to 6.94% the week ending Oct. 20, according to Freddie Mac. The most popular mortgage product inched up 2 basis points from last week and was the highest level since April 2002. A basis point is one-hundredth of a percentage point. At this same time last year, the rate was nearly four percentage points lower, at 3.09%.
The 15-year, fixed-rate mortgage averaged 6.23% this week, up from 6.09% a week before and 2.33% a year ago.
The average 5/1 adjustable-rate mortgage (ARM) was at 5.71%, down from 5.81% last week and 2.54% a year ago. As borrowing costs have surged, ARMs have become more popular since they now have a lower rate than fixed-rate mortgages. ARMs made up 12.8% of all applications for mortgages for the week ending Oct. 14, according to the latest Mortgage Bankers Association (MBA) report. That’s quickly approaching a 10% jump from comprising just 3% of all mortgage applications in January 2022.
The rates above don’t include fees or other costs associated with obtaining home loans.
Related: Compare Current Mortgage Rates
Mortgage Rates Forecast Into Early 2023
Even as mortgage interest rates shot upward over the past year, there has been some fluctuation in recent months. According to Freddie Mac, the average 30-year fixed mortgage rate slid over the summer, dipping to an average of 4.99% on August 4. However, rates have since resumed their climb.
As the Federal Reserve sends signals of more interest rate hikes in the coming months–and likely into 2023–mortgage rates will likely increase in kind. While the Federal Reserve’s actions do not directly impact mortgage rates, its monetary policies have a meaningful influence.
In the hopes of wrestling inflation down to a 2% benchmark, the Fed has raised the federal funds rate—the interest rate at which two depository institutions, such as banks and credit unions, trade funds—five times since March 2022.
However, the latest Consumer Price Index (CPI) report revealed a 0.4% increase in the cost of all consumer goods. This put the annual inflation rate at a 40-year high of 8.2%, indicating that the Fed’s actions are not yet doing the trick. In the meantime, high mortgage rates and high monthly payments continue to spook the average prospective home buyer.
According to the MBA, applications for mortgages declined by 4.5% for the week ending October 14, more than double the rate of decline compared to the week before. As a result, weekly mortgage application volume remains at the lowest level since 1997—the same year the Dow Jones Industrial Average closed over 7,000 for the first time. Yet, despite the slide in overall loan applications, ARM loan volume continued to tick up.
“With rates at these high levels, the ARM share rose to 12.8% of all applications, which was the highest share since March 2008,” said MBA Vice President and Deputy Chief Economist Joel Kan in an emailed statement. “ARM loans continue to remain a viable option for borrowers who are still trying to find ways to reduce their monthly payments.”
Related: Mortgage Rates Forecast For 2022
Where Is the Housing Market Headed?
Various indicators suggest that the housing market will remain stalled for the foreseeable future. According to the latest Zillow report, national home values stayed relatively flat between August and September but are still nearly 13% higher than a year ago. Between sticker shock and high mortgage rates, prospective home buyers are staying put, accounting for a roughly 30% decline in year-over-year home sales—a trend many experts expect to continue in the coming months.
In the latest monthly NAHB/Wells Fargo Housing Market Index (HMI), home builders’ confidence in the housing market took another dip in this ongoing climate of high inflation and rising mortgage rates.
The HMI index is on a scale from 0 to 100 and gauges the strength of the single-family housing market. The survey includes roughly 900 home builders, and a score below 50 indicates that U.S. homebuilders have a negative outlook.
The index sank by eight points from 46 to 38 between September and October, reflecting an ongoing theme of deteriorating confidence. This was the tenth consecutive drop since December when the index score was 84.
“High mortgage rates approaching 7% have significantly weakened demand, particularly for first-time and first-generation prospective home buyers,” said NAHB Chairman Jerry Konter, a home builder and developer from Georgia, in a press statement. Konter described the lack of housing affordability as a worsening and unsustainable situation and called on policymakers to address the crisis.
Yet, even as experts predict the housing market to remain cool in the coming months, there may be a silver lining for some prospective home buyers.
“(A)s many rate-sensitive shoppers stay sidelined, those who forge ahead now will find more options and more eager sellers than anytime since the pandemic began,” said Zillow senior economist Jeff Tucker in an emailed statement.
But what about prospective home buyers who can’t afford to jump into the game right now? Nicole Bachaud, an economist at Zillow, advises you to use this time to understand your credit score to see if there are ways to improve it by the time you are ready to purchase a home.
“If you have a high credit score, that can significantly change your mortgage rate,” says Buchard. “A couple of basis points on today’s mortgage rates can make a big difference in monthly payment.”