Mortgage rates hit their highest point since November 2008 this week, crushing homebuyer demand.
The rate on the 30-year fixed mortgage jumped to 5.89% from 5.66% the week prior, according to Freddie Mac. Rates have surged nearly three-quarters of a point in just three weeks and are now over 2.5 percentage points higher than the start of this year.
Elevated borrowing costs and inventory shortages have pushed inflation-struck homebuyers to the sidelines, while those who remain in the market are no longer rushing to make a bid, forcing sellers to reassess their pricing expectations.
"Mortgage rates rose again as markets continue to manage the prospect of more aggressive monetary policy to combat elevated inflation," Sam Khater, Freddie Mac's chief economist, said in a news statement.
Homebuyers wait out further home price drops
Demand for mortgages remained at a 22-year low by the end of August, according to the Mortgage Bankers Association’s survey for the week ending September 2, as purchase and refinance activity continued to plummet. Purchase activity has declined in nine of the last 10 weeks, down 23% from the same week a year earlier.
“Homebuyers may be incentivized to remain on the sidelines anticipating home price declines, contributing to a further cooling in home sales through the end of the year,” Doug Duncan, Fannie Mae’s chief economist, said in a statement.
Signs of softening home prices are also popping up.
The median home price fell to $435,000 in August, according to Realtor.com, down from $449,000 last month and June’s record high of $450,000. And the share of folks who believe home prices will fall within the next 12 months increased to 33% in August, according to a new Fannie Mae housing sentiment survey, up from 30% the month prior.
Still, home prices remain 39.6% higher than in August 2019. With rates hovering around 5.50%, the median monthly payment on the typical home is over $2,000, or about 61% more than last year.
“We’re just now starting to see more of the effects of the dramatic increase in rates from the start of the year,” Robert Heck, vice president of Morty, told Yahoo Money. “For homebuyers… rates may have to come down before we see short-term activity pick up again.”
Sellers reduce prices
As home sales cool, sellers have grown more pessimistic about their prospects.
Housing sentiment declined to a new record low in August, according to Fannie Mae, fueled by a drop in seller confidence. Only 59% of sellers believe it’s a good time to sell – its lowest point in two years – while 35% of respondents said it’s a bad time to sell.
Across the nation, home-sellers have been forced to slash listing prices to attract buyers. The share of homes with a price cut increased to 19.4% in August, up from 11% a year earlier. According to Realtor.com, that’s near average 2017 to 2019 levels.
“As home prices come down, buyers are having a little bit more bargaining or negotiation power and more options to purchase a home. But the amount of contingency waiving being reduced is market dependent,” Heck said. “Some markets in the Sunbelt area have had absolutely crazy home appreciation and people looking to purchase are finally having that pressure alleviated.”
At the same time, recent price cuts have scared off some sellers. As competition waned, newly listed homes followed, declining by 13.4% year over year.
“In normal years, we always see this end of summer slowdown around Labor Day and then activity tends to pick up in the fall again between September and December,” Heck said. “We’re definitely at a point where we could see activity pick up a bit, even if rates were to stay the same. But if mortgage rates come down, we’ll see that shorter term activity really jump.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.