mortgage rates and homebuyers

High Mortgage Rates Deter Homebuyers Across the Nation

Homebuyers across the United States are taking a step back from the real estate market as rising mortgage rates erode their purchasing power, casting a shadow over the housing sector’s health as autumn approaches.


According to the latest data released by the National Association of Realtors (NAR), pending home sales for August experienced a sharp decline of 7.1% compared to the previous month, marking a stark contrast to the 0.9% monthly increase recorded in July. The outcome surpassed the earlier estimate by Bloomberg economists, who had predicted a more modest 1.0% decline. Worryingly, this downturn was not confined to a specific region, as every part of the country witnessed both monthly and year-over-year decreases.


On an annual basis, pending transactions tumbled by a staggering 18.7%, raising concerns about the overall health of the housing market. This drop in the NAR’s index, a leading indicator of the housing market’s well-being, underscores the adverse impact of costly mortgages, soaring property prices, and limited inventory. Seasonal trends may have also played a role in this downturn.


Lawrence Yun, Chief Economist at NAR, pointed to the key factor contributing to this phenomenon, stating, “Mortgage rates have been on the rise, exceeding 7% since August, which has significantly reduced the pool of prospective homebuyers. Some potential buyers are taking a pause and reassessing their expectations regarding the location and type of home that aligns with their budgets.”


Regionally, contract signings in the Northeast witnessed a 0.9% dip compared to the previous month and an alarming 18.2% slump from August 2022 levels. Similarly, pending sales also saw a decline of 7.0% in the Midwest, falling a substantial 19.1% from a year ago.


The Southern region recorded a staggering monthly drop of 9.1% in pending sales for August, accompanied by a significant 17.6% year-over-year decline. Meanwhile, activity in the West receded by 7.7%, marking a substantial 21.4% decrease from August 2022 levels.


Orphe Divounguy, a senior economist at Zillow, explained, “The drop in pending home sales can be attributed to a combination of higher mortgage rates and seasonal factors. Typically, sales decrease during this time of the year, but recent rate increases have further suppressed both mortgage demand and housing supply.”


Elevated mortgage rates have dealt a dual blow to both supply and demand. Higher rates have discouraged homeowners from listing their properties for sale, leaving potential homebuyers buyers with limited options in the resale market. Divounguy remarked, “Buyers simply can’t purchase what isn’t available.”


In August, the average rate for a 30-year fixed mortgage surged to 7.23%, reaching its highest point since June 2001 when rates stood at 7.24%, as per data from Freddie Mac. Rates have remained above the 7% threshold for six consecutive weeks, putting a squeeze on affordability. The latest mortgage rate data is set to be released on Thursday at noon EDT.


Additionally, higher mortgage rates have dampened demand, causing many prospective homebuyers to balk at the elevated costs. Mortgage loan applications for home purchases dropped by 2% on a seasonally adjusted basis compared to the previous week, according to data from the Mortgage Bankers Association for the week ending September 22. Unadjusted figures show that the index measuring purchase applications was 27% lower than a year ago.


The surge in borrowing costs is even impacting the new home market, which had benefited from a shortage of resale inventory for much of the year. Sales of newly constructed homes slumped by 8.7% to a seasonally adjusted rate of 675,000 units in August, as reported by the Census Bureau’s latest data.


Colin Johanson, US Macro Economic Research Analyst at Barclays, noted, “The level of sales reflects the impact of elevated mortgage rates on housing demand. The decline can also be attributed to the sharp drop seen in last week’s August housing starts release, as many new home sales occur before or during construction, thus exerting downward pressure on today’s new home sales figures.”


The limited inventory in the market has allowed builders to step in and replenish the housing supply by offering various incentives to attract potential buyers to the newly constructed home market. However, the impact of these measures is constrained by the ongoing rise in borrowing costs.


“It’s evident that increased housing inventory and improved interest rates are crucial to revive the housing market,” Yun emphasized.


Nonetheless, the prospect of mortgage rates returning to more favorable levels in the near future remains uncertain. Federal Reserve Chair Jerome Powell’s recent statement indicated the possibility of another rate hike this year, with a likelihood of sustained higher rates if inflation fails to return to its 2% target.


Responding to this, Yun issued a cautionary note on mortgage rates, saying, “In the short term, there is a possibility that rates may rise to 8%.” The housing market, therefore, faces a challenging landscape as it grapples with the impact of surging mortgage rates and the broader economic climate.

Source: Yahoo Finance

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