The woes continue to mount for the housing market, especially potential buyers.
Last bad news: the 30-year fixed-rate mortgage averaged 5.30% in the week ended May 12, the highest since July 2009, according to real estate agency Freddie Mac. That compares with 5.27% a week earlier and 2.94% a year earlier.
That means a year ago homebuyers were paying $294 in annual interest on every $10,000 of their mortgage, compared to $530 now. That’s an 80% increase.
“Rising mortgage rates year-to-date have the same impact on affordability as home prices rising more than 20%,” said Greg McBride, chief financial analyst at Bankrate.com, at Bloomberg.
The rise in mortgage rates is of course the result of runaway inflation, which is pushing bond yields higher and forcing the Federal Reserve to raise interest rates.
“In the coming months, we expect monetary policy and inflation to discourage many consumers, weaken buying demand and slow house price growth,” said Sam Khater, chief economist at Freddie. Mac, in a statement.
Rose Mortgage Applications
Some good news for housing has emerged recently. Mortgage applications rose 2% in the week ended May 6 from the previous week, according to the Mortgage Bankers Association (MBA). Purchases were up 5% from the previous week, but down 8% from a year ago.
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“Despite a slow start to the home buying season in the spring of this year, potential buyers are showing some resistance to higher rates,” MBA economist Joel Kan said in a statement.
“Purchase activity has now increased for two consecutive weeks. More borrowers continue to use ARMs [adjustable rate mortgages] to combat higher rates. The share of ARMs in total mortgage applications rose to 10.8%, the highest since 2008.
You might think homebuyers would turn away from ARMs as rates rise.
But, “ARM loans usually have lower rates [starting] than fixed-rate mortgages, and as that spread has widened, ARM loans have become more attractive to borrowers already facing home-buying loan amounts near record highs,” Kan said.
Rates on ARMs are sometimes fixed for the first five, seven or 10 years of the mortgage. The danger, of course, is that ARM rates can skyrocket later in the mortgage term.
Bank of America’s point of view
Meanwhile, Bank of America economists expect higher mortgage rates and lower affordability to drive existing home sales lower this year. They forecast an annual sales pace of 5 million units for existing homes by December, down 18% from 6.1 million in 2021.
But they note that the supply of existing homes for sale is only two months off the current sales pace and that demographics are driving demand.
As a result, economists predict a 15% increase in house prices this year. The Case-Shiller home price index jumped 19.8% in the 12 months to February.