Mortgage rates have surged to a 23-year high this week, with the average 30-year fixed mortgage climbing to 7.31% from 7.19% the previous week, according to data from Freddie Mac. This surge in mortgage rates is the most pronounced since mid-December 2000, when it averaged 7.42%.
This spike in rates closely mirrored the surge in the 10-year Treasury yield, which reached its highest point since 2007 on Wednesday, amidst mounting concerns over a potential U.S. government shutdown. The development follows a Federal Reserve announcement just a week prior, indicating an intention to maintain a higher benchmark interest rate for an extended period.
For potential homebuyers, this rise in rates has once again diminished their purchasing power, providing ample reason to adopt a cautious approach. Moreover, those still in pursuit of a home may face even steeper rates in the near future.
Jason Sharon, owner of Home Loans Inc., conveyed, “Are higher rates causing a significant impact on buyers? The answer is yes… Will it kill the housing market? Absolutely not. However, it is pumping hard on the brakes.”
The surge in mortgage rates has continued to dampen purchasing demand in the housing market. According to the Mortgage Bankers Association (MBA) survey for the week ending Sept. 22, purchase applications for mortgages fell by 2% on a seasonally adjusted basis compared to the previous week. Overall, purchase demand was 27% lower than the corresponding week a year ago.
Beatrice de Jong, a real estate broker at The Beverly Hills Estates, remarked, “Presently, there are fewer buyers actively searching for homes, leading to reduced competition.”
Curiously, inventory is actually on the rise, a rarity for this time of year. Mike Simonsen, CEO of Altos Research, noted, “New listings are still running 9-10% fewer homes for sale each week than last year.” This is primarily attributed to homeowners’ reluctance to sell and forfeit their current, substantially lower mortgage rates.
Orphe Divounguy, senior economist at Zillow, explained, “Eighty percent of homeowners with a mortgage have a mortgage rate below 5%… These homeowners have little incentive to sell, trading in their low monthly housing costs for the much higher housing costs that they would face as a buyer in today’s mortgage rate environment.”
This supply-demand imbalance is evident in the latest sales figures. New home sales stumbled in August, while pending home sales, a precursor to future closed sales, declined during the same period. Closed sales of previously owned homes reached a seven-month low.
At present, the inventory scenario is propping up prices. According to the National Association of Realtors, the median price of a resale home sold in August was $407,100, the highest for the month of August and the fourth highest ever recorded.
However, the market’s landscape could undergo a seismic shift if rates continue their ascent. A housing economist recently cautioned that mortgage rates might reach 8% following Federal Reserve Chair Jerome Powell’s indication of a sustained high-rate environment.
In response, homebuilders, who recently benefited from increased sales due to buyers exiting the sluggish resale market, are rolling out incentives to entice potential buyers. In September, 32% of builders reduced their home prices, as per NAHB findings, compared to 25% the previous month. This marks the highest percentage of builders lowering prices since December 2022 (35%).
A separate survey conducted by Altos Research revealed that 37% of the market implemented price cuts for the week ending Sept. 25, a figure surpassing recent years, except for the same period last year.
Simonsen highlighted, “A normal balanced market will have price reductions around 30-35% of homes for sale with price cuts… As it approaches 40%, that’s a clear indicator that buyers are making fewer offers.”
Source: Yahoo Finance