‘Demand remains very weak’: Even as mortgage rates drop again, experts say many buyers are feeling the brunt of rising 'affordability hurdles'

Serah Louis
·4 min read
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‘Demand remains very weak’: Even as mortgage rates drop again, experts say many buyers are feeling the brunt of rising 'affordability hurdles'
‘Demand remains very weak’: Even as mortgage rates drop again, experts say many buyers are feeling the brunt of rising 'affordability hurdles'

Mortgage rates continued to weaken for the fifth week in a row, after the Fed announced its seventh rate hike of the year.

Sam Khater, Freddie Mac’s chief economist, points to “softer inflation data and a modest shift in the Federal Reserve’s monetary policy” for the continued drop.

The latest consumer price index report from the Bureau of Labor Statistics indicated that inflation may be slowing, with prices across the board rising less than expected in November.

And although the federal funds rate has gone up again this week, it was raised by just half a point — compared to previous hikes of 0.75 basis points.

“The good news for the housing market is that recent declines in rates have led to a stabilization in purchase demand,” Khater says.

“The bad news is that demand remains very weak in the face of affordability hurdles that are still quite high.”

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30-year fixed-rate mortgages

The average 30-year fixed rate dipped slightly to 6.31%, Freddie Mac reported Thursday.

This was down from 6.33% the week prior and 3.12% a year ago.

“For homebuyers and homeowners, the retreat in mortgage rates of the past several weeks has been a welcome development,” says George Ratiu, manager of economic research at Realtor.com.

“With more homes available for sale, and more of them sporting price cuts, some buyers are running the math and finding that the slide in rates is offering better options within their budgets.”

Ratiu adds that while mortgage rates returning to the 3% range is unlikely to occur anytime soon, “even a flattening of rates in the 5.5% – 6.0% range in 2023 would offer housing markets an improved foundation.”

15-year fixed-rate mortgages

The average 15-year fixed also declined to 5.54% — compared to last week’s rate of 5.67%. A year ago at this time, the 15-year home loan averaged 2.34%.

Nadia Evangelou, senior economist for the National Association of Realtors, notes that rates are still more than double from what they were a year ago, plus home prices are still high due to limited inventory.

She says middle-income buyers who earn $75,000 a year “face the most significant housing shortage compared to any other income group.”

“In a balanced market, these buyers should be able to afford half of the homes listed for sale. However, these middle-income buyers can afford to buy only 20% of all available listings,” writes Evangelou.

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Home price growth slows to single digits

Danielle Hale, chief economist at Realtor.com, says last week’s housing data showed further pullback from both buyers and sellers.

“Whether holiday cheer or a still dismal view of current housing market conditions is the bigger driver of the pullback is an open question, but the result is that housing market balance tipped a bit further in favor of buyers,” writes Hale.

“In fact, the typical price of for-sale homes was up ‘only’ 9.5% relative to one year ago. While this is still higher than a more normal pace of home price increase, this slowdown marks the first time in 49 weeks — nearly one year — that median home prices have advanced at single-digit pace.”

Hale expects home sales to remain low, however, as the Fed keeps interest rates high to stem inflation. More rate hikes are expected in the new year, and policymakers are projecting the federal funds rate to hit the 5-5.25% range (it’s currently at 4.25-4.5%) by the end of 2023.

Mortgage, refinance applications see jump

While mortgage rates still remain three percentage points higher than a year ago, the recent decline encouraged a rise in both purchase and refinance activity.

Mortgage applications jumped 3.2% while the refinance index increased 3% from last week, according to the Mortgage Bankers Association (MBA).

Joel Kan, vice president and deputy chief economist at the MBA, suggests “financial markets reacted to mixed signals regarding inflation and the Federal Reserve’s next policy moves.”

“The ongoing moderation in home-price growth, along with further declines in mortgage rates, may encourage more buyers to return to the market in the coming months,” Kan adds.

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