Mortgage rates inched closer to 7% this week, remaining at their highest point since April 2002 and driving more buyers and sellers from the market.
The average rate on the 30-year fixed mortgage edged up to 6.94% from 6.92% last week, according to Freddie Mac. Rates have increased more than a full point since the start of September and are now more than double where they were at the beginning of the year.
The rapid ascent, driven by the Federal Reserve’s actions to rein in runaway inflation, has smothered buyer demand, while homeowners hunker down, unwilling to give up their current ultra-low rate.
“It’s actually first-time buyers that are the most impacted in terms of affordability. They just can’t afford very much given how high home prices are,” Taylor Marr, deputy chief economist at Redfin, told Yahoo Money. “The equation is so much more in favor of renting than owning right now because of higher interest rates that I just can’t imagine many first time homebuyers would stay in the market if they can easily rent for a better deal.”
High rates chill mortgage demand
Homebuyer demand plunged to a 25-year low last week, the Mortgage Bankers Association’s latest survey found, and has declined for the fourth straight month. The volume of mortgage applications for purchases decreased 4% from one week earlier, and was 38% lower than the same week a year ago.
Rate hikes have pushed more buyers toward adjustable-rate loans (ARMs), which have lower rates. The share of ARMs jumped to 12.8% of total applications last week, up from 11.7% a week earlier and its highest rate since March 2008.
Still, it may be too late for some buyers.
“I qualified a gentleman that owns a painting company in March for $300,000, he called today to get an updated pre-approval,” Jason Sharon, owner and broker of Home Loans Inc, told Yahoo Money. “The new limit based is $220,000. Back then, rates were at 3.5%, now they are 7%.”
Last week, with rates at 6.92%, the average monthly mortgage payment was $2,254 after offering 20% down, according to Realtor.com. That’s roughly 75% more from the same week last year, adding $11,600 to the annual cost of financing a home.
“It’s obvious that for many buyers, there is a real financial ceiling that they’ve hit,” George Ratiu, senior economist and manager of economic research at Realtor.com, told Yahoo Money. “They can’t stretch their budgets anymore.”
By comparison, the average rent asking price in September slid to $1,759, down $12 from last month and $22 from July’s peak. That was the slowest growth rate registered in 16 months — an encouraging sign for renters despite worsening affordability.
“Rising rates are really affecting the debt-to-income ratio which is reducing what someone can qualify for,” Sharon said. “It is also making people realize how much more that home costs per month, therefore they are choosing to rent.”
Home sellers grow wary
As homebuyers retreat from their purchase plans, a growing share of home sellers are also pulling their listings from the market.
The number of homes for sale at the end of September was 1.25 million, the National Association of Realtors reported Thursday, down 2.3% from August and 0.8% from the prior year. New listings were also down 17%, indicating that sellers are rethinking their plans.
While the median sales price for existing homes was $384,800, a 8.4% increase from September 2021, that was the third time in a row that the price has fallen month over month.
Roughly 60,000 home-purchase agreements also fell through in September, according to Redfin, equal to 17% of homes that went under contract that month. That was the highest percentage on record, with the exception of March 2020 when the COVID outbreak was first announced.
The days of bidding wars are also fading into the rearview mirror. Less than 46% of home offers written in September faced competition, Redfin data found, the lowest share since the onset of the pandemic. As a result, a record 22% of homes for sale in September registered a price reduction.
“A lot of sellers are pulling their home off the market and just deciding, I've cut my home once by $50,000. I don't want to do it again. I'll just stay put,” Marr said. “I know someone on our team, who was selling their home in Austin and had to drop their price multiple times before they just decided, forget it – I’ll just rent it out. I think this is also shifting some housing supply onto the rental market and helping bring down rents too.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.