Mortgage rates dropped below 7% this week, but remain high enough to keep price-rattled homebuyers on the sidelines.
The rate on the average 30-year fixed mortgage fell to 6.95%, down from 7.08% the week prior, according to Freddie Mac. Still, rates are 3.73 percentage points higher since the start of the year, the largest year-to-date increase in over 50 years.
Sharply higher rates in combination with elevated home prices and still-high inflation have triggered a fight-or-flight response among buyers and sellers. As some flee the market altogether, others are set on closing a purchase or making a sale before rates rise even more.
“Homebuyers are in a rather tough spot at the moment. Home prices are still very high, inventories of homes available to buy remain very thin, and mortgage rates are at 20-year highs, so conditions are pretty adverse,” Keith Gumbinger, vice president of HSH.com, told Yahoo Money. “None of these conditions are likely to improve significantly for at least a while, and with the holiday season coming up, the inventory issue might even tighten further as sellers hold off for better conditions.”
Homebuyers shift to ARMs
Mortgage applications fell for the sixth consecutive week, according to the Mortgage Bankers Association latest survey, as higher rates continued to deteriorate both buyer and refinance activity. The volume of purchase applications fell 1% for the week ending October 28, and was 41% lower than the same week a year prior.
To offset the financial impact of higher rates, more buyers are turning to adjustable-rate mortgages.
Last week, ARM loan rates were the only product with rates at 3%, MBA Economist Joel Kan said in a news statement, while all other loan types were more than double what they were a year ago.
“For those brave enough to be in the market now, it's a good time to be opportunistic; look for relative pricing bargains, be prepared to act, and consider a lower-cost ARM to try to save a few dollars over the next few years,” Gumbinger said. “Being aware of the risks, and paying attention at all times for chances to refinance to a fixed-rate mortgage, of course. A good deal on an ARM — one with a rate break of about 1% — might improve a homebuyer's buying power by as much as 10% — or lower their monthly payment a considerable amount.”
Still, for many other buyers, the numbers aren’t working out.
At current rates, homebuyers are facing a monthly mortgage payment that’s approximately $1,000 more than a year ago, according to Realtor.com. At last week's rate of 7.08%, a typical buyer putting a 20% down payment would be facing a monthly mortgage payment of roughly $2,296.
Sellers back off
As the buyer pool shrinks, home sellers are getting even more discouraged.
The number of homes for sale at the end of September was 1.25 million, the National Association of Realtors found, down 2.3% from August. New listings also slowed, down 17% as more sellers backed out of the cooling market.
Those still hoping to make a deal are offering up incentives.
The share of homes with price reductions was up 10.3 percentage points to 20.9% in October, according to Realtor.com, above 2017 and 2019 levels, but slightly under the 2018 share of 21.2%. Overall, the median listing price in October slid $2,000 to $425,000.
“Buyers are willing to…take some seller concessions to buy down their rate and make a deal that works for everyone,” Taylor Marr, deputy chief economist at Redfin, told Yahoo Money. “Sellers that aren’t scared away by the weak market are sort of willing to take what they can get.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.