Mortgage rates surpassed 7% again this week after a short-lived respite as Americans’ confidence in housing hits a new low.
The rate on the average 30-year fixed mortgage increased to 7.08% from 6.95% the week prior, according to Freddie Mac, marking the second time rates exceeded 7% since April 2002. The last time was at the end of October. Rates are also nearly 4 percentage points higher than at the start of the year.
At the same time, housing confidence plunged to an all-time low in October, according to Fannie Mae’s index that dates back to 2011, recording the eighth consecutive monthly drop in sentiment levels.
Higher rates — driven by the Federal Reserve’s fight on inflation — have crushed homebuyers’ purchasing power and hopes. Sellers, too, face headwinds as tepid demand forces more to offer price reductions to strike a deal.
“For homebuyers, conditions are pretty adverse,” Keith Gumbinger, vice president of HSH.com told Yahoo Money. “Rates are likely closer to cycle higher than not, but what happens largely depends on whether inflation starts a meaningful downturn toward the Fed's 2% goal, whether the economy starts to slow significantly and whether the labor market starts to loosen.”
Homebuyer demand remains weak
Demand for mortgages slid further last week, according to the Mortgage Bankers Association’s latest survey of applications. While purchase applications increased slightly for the first time in six weeks, they are down 41% from a year ago, its lowest point since 2015.
To soften the financial impact of higher rates, more buyers still in the market are turning to adjustable-rate mortgages and government loans.
This week, the average 5/1 ARM rate quoted by Freddie Mac was 6.06%. While that’s more than double its rate from the start of the year, it's still a full point lower than the market rate on a 30-year fixed loan.
“At the industry level, the share of origination volume that’s going to government loans, primarily FHA as well as VA and USDA is up,” Robert Heck, vice president of mortgage at Morty, told Yahoo Money. “We’ve also seen a shift of people turning to ARMs, since rates for these programs remain kind of low. They do much better and are built for higher-rate, less affordable market conditions.”
At current rates, the median monthly mortgage payment is roughly $1,140 more than a year ago, or up 77%, according to Realtor.com. For payments to return to their year-ago levels, home prices would need to plunge by 45%.
“The combination of rising mortgage rates and higher home prices has certainly placed first-time home buyers at the greatest disadvantage,” Ruben Gonzalez, chief economist at Keller Williams told Yahoo Money, noting these buyers lack home equity gains, “which allow homeowners to roll accumulated equity into their home purchase as a means of reducing their payment by minimizing their needed principal.”
Seller confidence plummets
On the other side, sellers have grown more pessimistic about their prospects.
Just 16% of respondents said now is a good time to purchase a home, a new survey low, according to Fannie Mae. Meanwhile, the share who said it's a good time to sell decreased from 59% in September to 51% in October.
“Given the perceived economic risk right now, homeowners are likely to take a wait and see approach over the next year unless they’re in a situation where moving is a necessity,” Gonzalez said.
Those who need to sell are slashing their listing prices.
The share of homes with a price reduction was 20.9% in October, up from 10.6% a year ago, according to Realtor.com. The median listing price in October was $425,000, down from an all-time high of $449,000 in June.
“We know home purchases are often motivated by factors outside finances, and we will still see people buying and selling homes over the next year,” Gonzalez said. “But with payments essentially doubled from where they were a couple of years ago, the pool of potential homebuyers is certainly being reduced substantially.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.