With mortgage rates nearly doubling since last year, it’s ‘increasingly clear’ a correction is coming

The interest rate on America’s most popular home loan moved higher this week amid record-high inflation and mounting concerns that the economy is on the cusp of a recession.

The average rate on a 30-year fixed mortgage is now nearly double what it was last year, a new report shows.

At the current interest rate, the monthly mortgage payment for a median-priced home is 59% higher than it was a year ago, according to Realtor.com.

Steeper borrowing costs, coupled with still-painful home prices, are cooling the market considerably.

“It’s becoming increasingly clear that the real estate markets are headed for a correction,” says George Ratiu, senior economist with Realtor.com.

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30-year fixed-rate mortgages

The average rate on a 30-year fixed home loan is 5.54%, up from 5.51% last week, housing finance giant Freddie Mac reported Thursday. This time last year, the 30-year rate was averaging 2.78%.

The market is feeling the heat as the rate inched up for the second week in a row. Mortgage demand has dropped to its lowest level in over two decades, and sales have fallen for the fifth straight month.

Competition is plummeting as would-be buyers are dropping out of the home buying process.

Some 60,000 purchase agreements were canceled last month, according to the Redfin real estate firm. That amounts to 14.9% of the homes that went under contract during the month and a near record.

“Consumer concerns about rising rates, inflation and a potential recession are manifesting in softening demand,” says Sam Khater, Freddie Mac’s chief economist. “As a result of these factors, we expect house price appreciation to moderate noticeably.”

Average home price appreciation is expected to come in at 4% next year, down from 12.8% this year, according to a new forecast from Freddie Mac.

15-year fixed-rate mortgages

The 15-year fixed-rate mortgage — popular with refinancing homeowners — is averaging 4.75%, up from 4.67% last week, Freddie Mac says. The 15-year rate is more than double where it was last year at this time when it averaged 2.12%.

The steeper rates are causing the housing market to rebalance in many areas. In Austin, for example, buyers are regaining bargaining power as sales last month fell 20% and new listings rose by the same amount.

“When we look at the data across the Austin housing market, it reinforces what we see on a national scale: a combination of cooling demand from the tremendous surge in mortgage rates and rising prices with a noticeable increase in supply,” Ratiu says.

“The shift signals welcome news for more buyers who may be ready to embrace a post-pandemic reality and take advantage of more inventory.”

5-year adjustable-rate mortgages

At 4.31%, the five-year adjustable-rate mortgage — or five-year ARM — is actually down from last week when it was averaging 4.35%. Last year at this time, the shorter-term rate averaged 2.49%.

Rates on adjustable mortgages are tied to the prime rate. ARMs start off with lower interest costs, but they can surge once the initial fixed-rate period ends.

This week’s slight dip could push some buyers into ARMs. Those taking out a five-year ARM now are hoping they’ll have the option to refinance into a lower, fixed-rate mortgage by the time their five-year term expires.

What could cause rates to go even higher?

Mortgage rates have gone up significantly in recent months as the Federal Reserve has been hiking its own borrowing rate in its fight against inflation, though analysts worry these hikes could trigger a recession.

Next week, the central bank is expected to raise its benchmark rate for the fourth time this year.

Freddie Mac predicts the 30-year mortgage rate will average 5% this year — two percentage points higher than last year’s average. Next year, the rate is expected to average 5.1%.

“While the market is cooling, it’s not coming to a crashing halt,” says Shoshana Godwin, a Redfin real estate agent in Seattle. She suggests that shoppers who can still afford to buy in today’s market do so while competition is declining.

Indeed, mortgage activity, an indicator of the market’s strength or weakness, has fallen for the third week in a row and reached its lowest level since 2000.

Mortgage applications have fallen 6.3% from a week earlier, according to the latest survey from the Mortgage Bankers Association.

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