In a glimmer of respite for prospective homebuyers, mortgage rates saw a marginal dip this week, temporarily halting their relentless climb towards 8%. According to the latest report from Freddie Mac on Thursday, the average rate on the 30-year fixed mortgage inched down from 7.79% to 7.76%, breaking a streak of seven consecutive weeks of increases. However, despite this modest drop, rates have lingered above 7% for an uninterrupted twelve-week period, a trend not witnessed since the middle of 2001.
The tandem of historically high home prices and elevated mortgage rates continues to strain the budgets of potential homebuyers, causing their monthly mortgage payments to skyrocket.
Hannah Jones, an economic research analyst at Realtor.com, acknowledged the challenges faced by today’s homebuyers, emphasizing the scarcity of available properties, persistently high listing prices, and multi-decade high mortgage rates. She expressed gratitude for any potential relief from the escalating costs of homeownership.
For a significant number of homebuyers, these elevated rates have become a major roadblock. Some find themselves unable to move forward due to theoretical monthly payments that exceed their eligibility for a mortgage.
The Mortgage Bankers Association reported on Wednesday that the number of mortgage applicants has dropped to levels not seen since 1995, spanning four presidential administrations.
Faced with these daunting conditions, some intrepid buyers are turning to adjustable-rate mortgages, which initially offer a more manageable interest rate before potentially adjusting upwards or downwards based on a specified rate index after a fixed period. For example, the five-year ARM, featuring a fixed rate for the initial five years, averaged 6.77% last week, resulting in a 10% surge in applications for this type of home loan.
JPMorgan Chase CEO Jamie Dimon noted the prevalence of adjustable rate mortgages among buyers, but stressed that the overall cost of carrying a mortgage remains high.
In a peculiar turn of events, homeowners are indirectly influencing buyers’ decisions. Many are opting to forgo selling their homes in a high-rate environment, as they currently enjoy a low interest rate on their existing mortgages. The majority of homeowners with mortgages currently hold rates at 5% or lower.
This dynamic has led to a scarcity of previously owned homes on the market, which in turn has bolstered home prices despite tepid demand.
In August, home values reached another record high, largely attributed to the ongoing inventory challenges within the market.
However, this shortage of resale inventory has proved advantageous for homebuilders this year, given their predominant presence in the industry. They are also sweetening the deal with enticing incentives, one of the most appealing being mortgage rate buydowns.
This strategy involves builders covering upfront costs to temporarily or permanently lower the mortgage rate. For many major builders with robust financing arms or mortgage lending partnerships, this means locking in a reduced rate for the entirety of the loan. This serves to provide buyers with a greater sense of security.
As a result, instead of financing at 7.76%, buyers of new homes can secure their dream properties, complete with modern amenities, at a rate 2 percentage points lower. The difference is substantial.
LGI CEO Eric Lipar emphasized the company’s dedication to offering consumers the lowest fixed rates possible on a weekly basis, achieved through the investment of discount points.
For reference, the monthly mortgage payment on a $400,000 home with 20% down at 7.76% amounts to $2,295. At 5.76%, the monthly payment drops by $426 to $1,869.
Numerous executives in the homebuilding industry have lauded the buydown strategy during recent earnings calls, attributing it to enabling entry-level buyers to navigate their budgets and qualify for higher rates.
“As rates continue to increase, we’re using more of it to get people qualified than we were maybe two quarters ago,” stated Meritage Homes CEO Phillippe Lord during the company’s earnings call.
Meritage Homes CFO Hilla Sferruzza underscored the importance of using this approach as a marketing tool to attract potential buyers to their communities.
Source: Yahoo Finance
