Inflation hit home prices hard and mortgage rates continued to rise, hitting 7% for the sixth week in a row.
For the week of September 29, the 30-year mortgage was at 6.70%, up 6.29% from the previous week.
Mortgage rates are at their highest since July 2007.
Inflation has risen since the start of this year, lowering the Federal Reserve’s borrowing costs.
As a result, mortgage rates more than doubled. The campaign and central bank efforts to contain inflation have fueled investor concerns about runaway bond markets.
“The uncertainty and volatility in financial markets is heavily impacting mortgage rates,” said Sam Khater, chief economist at Freddi Mac.
According to Freddie Mac, the average mortgage rate is based on a study of conventional mortgages to purchase homes for borrowers with excellent credit and a 20% down payment.
Why are interest rates rising at such a furious pace?
The Federal Reserve’s aggressive rate hikes are producing the results needed to reduce demand, especially in the real estate sector.
Rising interest rates caused house prices to drop, leading to a drop in sales.
However, there is still a shortage of owner-occupied homes, which keeps prices high.
According to Bob Broeksmit, president and CEO of the Mortgage Bankers Association, the Fed’s efforts to curb inflation are having a major impact on the mortgage market.
“Mortgage rates have increased more than a percentage point in the past six week,” said Broeksmit.
“Refinance and purchase applications continue to decrease on both a weekly and annual basis.”
Realtor.com executive and economist George Ratiu said rates should continue to rise, stating:
“While even two months ago rates above 7% may have seemed unthinkable, at the current pace, we can expect rates to surpass that level in the next three months.”
While the Fed does not directly set the interest rates that borrowers pay on mortgages, its actions do have an impact.
For example, mortgage rates are generally based on the yield of 10-year US Treasury bonds.
When investors see or expect interest rate increases, they sell government bonds, which results in higher yields and higher mortgage rates.
Ten-year government bond yields hit 4% this week, a level last seen in 2008.
According to Ratiu, financial market volatility is an indicator of uncertainty, driven by solid economic activity and expectations of a slowdown in 2023.
“The main concern is Americans’ ability to weather 40-year high inflation, which is shrinking paychecks amid sharp rent increases and still-rising home prices, not to mention high interest rates, which are curbing households’ ability to borrow,” said Ratiu.
Deterioration of affordability
Would-be buyers are grappling with the most inaccessible housing market in the past four decades, driven by stubbornly high house prices, rising interest rates and falling wage values.
According to a calculation by Freddie Mac, buyers who paid 20% for a $ 390,000 home in 2021 and financed the rest with a 30-year fixed-rate mortgage at an average interest rate of 3.01% had a monthly mortgage payment of $ 1,317.
Today, homeowners who pay 6.70% interest for the same home would pay $ 2,013 per month in principal and interest, or $ 696 more per month.
According to Realtor.com, mortgage rates have increased significantly this year, costing typical buyers $ 107,000 in purchasing power.
Families earning an average income on a 20% down payment could afford homes for $ 448,700 at the beginning of the year when the interest rate was 3.1%.
According to data from Realtor.com, the same family can only buy a $ 341,700 home with interest rates up to 7%.
“The huge surge in mortgage rates over the last nine months have squashed many buyers’ budgets, leading to a significant pullback in transactions,” said Ratiu.