Mortgage rates surge closer to 7%
Mortgage rates continued their steep climb this week, surging closer to 7%, and forcing more would-be buyers back to the sidelines.
The rate on the average 30-year fixed mortgage increased to 6.50% from 6.32% the week prior, according to Freddie Mac. Rates have increased 41 basis points this month, after government data showed inflation had risen slightly last month, reversing most of the decline witnessed since mid-November.
The sharp uptick in rates has squeezed homebuyer demand, driving inflation-weary homebuyers to lower their budgets or abandon their purchasing plans. Meanwhile, the handful of buyers still in the market are negotiating sales before rates further erode their buying power.
“Still-high home prices and elevated rates have crushed affordability,” Keith Gumbinger, vice president of HSH.com told Yahoo Finance. “That said, there is reasonable demand and ability by potential homebuyers to engage in the market, but there are still too few homes for sale from which to hope to find something suitable at a price a prospective buyer can actually afford. All combined, these things are dampening the market.”
Homebuyer demand shrinks further
As mortgage rates climb higher, a growing share of homebuyers have decided to walk away from their purchase plans.
The volume of mortgage applications for a purchase fell 18% compared with the previous week, the Mortgage Bankers Association (MBA) survey of applications for the week ending Feb. 17 found. Overall, purchase application volume was down 41% from a year ago, with the purchase index at its lowest point since 1995.
“This time of the year is typically when purchase activity ramps up, but over the past two weeks, rates have increased significantly,” Joel Kan, MBA’s vice president and deputy chief economist said in a statement. “The increase in mortgage rates has put many homebuyers back on the sidelines once again, especially first-time homebuyers who are most sensitive to affordability challenges and the impact of higher rates.”
The pullback in demand doesn’t come as a surprise. According to Jeff Reynolds, broker at Compass and founder of UrbanCondoSpaces.com, homebuyers have lost roughly 10% of their purchasing power in the last two weeks alone due to the sharp uptick in rates.
“That creates a lot of rate shock for buyers,” Reynolds said.
Softer home prices aren’t much help for some price-struck buyers, either. According to Realtor.com, home prices have decreased 11% over the past 7 months to an average of $400,000 in January. Still, at last week’s rate of 6.32%, the buyer of a median-priced home was looking at a $1,985 monthly mortgage payment – that’s 42% higher than last year, though 6% lower than it would have been in June 2022.
“It was inevitable that demand would slow,” Reynolds told Yahoo Finance. “We had our worst seasonally adjusted mortgage purchase application reading in recent history. We’ll find out in the next 30 days if buyers are getting used to higher rates of it they will stay on the sidelines waiting for rates to come back to earth.”
The time to negotiate is now
The window of opportunity for some homebuyers to snatch a good deal could be ending soon, as sellers continue to pull back their generous incentives ahead of the spring selling season.
At least 31% of builders reduced home prices in February, according to the National Association of Home Builders (NAHB), down from 35% in December and 36% in November. The average price drop also grew more conservative, falling just 6% in February, down from 8% in December.
Buyer incentives – such as mortgage rate buydowns, paying toward closing costs or repairs – were also limited as mortgage rates had appeared to stabilize earlier this month. Only 57% of builders offered incentives in February, NAHB cited, down from 62% in December and 59% in November.
“The opportunity to negotiate incentives may not last long,” Reynolds noted, especially if buyer activity picks up toward the spring and housing inventory remains low.
Still, that’s not to say you won’t be able to negotiate now. According to Reynolds, one of his clients in Seattle recently got a 17% home price reduction, and additional contingencies paid for by the seller – deals that were hard to attain a year ago.
“I have client that just bought a house that was on the market for over 7 months and it didn't sell. Right when it came off the market, we jumped on it and negotiated $500,000 off the previously listed price,” Reynolds said. “This was an incredible negotiation. On top of the price drop, we were able to add an inspection and other contingencies you don't usually have access to in the market. It's been a seller's market for nearly a decade.”
Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
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