OCTOBER 28, 2022
Philip Cheung / NY Times–
Mortgage rates barreled past the 7 percent mark on Thursday to their highest level since 2002, as the Federal Reserve’s aggressive interest rate increases, meant to combat inflation, continued to seep through the economy and weigh increasingly on the housing market.
Rates on 30-year fixed-rate mortgages — the most popular kind among home buyers in the United States — rose to 7.08 percent, up from 6.94 percent last week and 3.14 percent from this time last year, according to the latest weekly survey by Freddie Mac. Rates had already surpassed 7 percent, according to other trackers, but this is the first time that the closely watched Freddie Mac survey surpassed that level in two decades.
“As inflation endures, consumers are seeing higher costs at every turn, causing further declines in consumer confidence this month,” Sam Khater, the chief economist at Freddie Mac, said in a statement. “In fact, many potential home buyers are choosing to wait and see where the housing market will end up, pushing demand and home prices further downward.”
Even though mortgage rates have rocketed higher over a short period, they are still slightly below their long-term average of about 7.8 percent, according to Freddie Mac, which began tracking borrowing costs in 1971. In the early 1980s, rates stretched well into the double digits, exceeding 18 percent in 1981.
Mortgage rates usually track the 10-year Treasury note, which is influenced by a variety of factors, including the Fed’s efforts to rein in inflation and growing concerns among investors that a recession is imminent. Stress in the underlying market for bonds backed by household mortgages — which factors into the price consumers pay — has also pushed rates higher. The U.S. central bank is expected to raise interest rates another 0.75 percentage points at its meeting next month.
The rapid rise in borrowing costs has already taken a toll on the housing industry, where home building and sales have slowed, dragging on overall economic growth in the third quarter. Existing home sales in September fell nearly 24 percent from the previous year, according to the National Association of Realtors. It was the eighth consecutive month of declines.
The rise in home prices has also begun a swift deceleration. The S&P CoreLogic Case-Shiller National Home Price Index, which tracks single-family home prices, rose 13 percent for the year ending in August, compared with a 15.6 percent increase in July, according to a report released this week. The decline — of 2.6 percentage points — between those two yearlong periods is the steepest drop in the history of the index, which dates to 1987.
“These data show clearly that the growth rate of housing prices peaked in the spring of 2022 and has been declining ever since,” Craig J. Lazzara, a managing director at S&P Dow Jones Indices, said in a statement.
But prices haven’t slowed nearly enough to offset higher borrowing costs. The national median mortgage payment in September rose to $1,941, up 5.5 percent from August, according to a report by the Mortgage Bankers Association, which was also released on Thursday. The median payment has jumped 40 percent, or $558, from the start of the year.
“With mortgage rates continuing to rise, the purchasing power of buyers is shrinking,” Edward Seiler, the associate vice president of housing economics at the bankers association, said in a statement. The median loan amount in September was $305,550, down from the February peak of $340,000, its highest point since the inception of the association’s index in July 2009.
Liz Rossof, a real estate broker with Re/Max Professionals, has witnessed that dynamic with the home buyers she works with in northwest Denver. She had clients who qualified for a $675,000 mortgage in January — but by May, with rates about two percentage points higher, their housing budget had dropped more than $100,000. At the same time, home prices were still rising, so her clients felt extra squeezed.
“It was hard for them,” Ms. Rossof said. “A lot of lenders are like, ‘Rates are still historically low,’” she said. “But that doesn’t mean much to the buyer who is now paying three times as much interest as they were.”
The frenzied mood of 2021 — and even early this year, when home buyers rushed into the market to try to lock in low interest rates — had begun to fizzle once rates crossed the 5 percent mark in late April and early May, Ms. Rossof said. And now, two percentage points higher, buyers are increasingly reluctant to make a move — or they’ve been priced out altogether.
Indeed, the volume of mortgage locks in September — that is, when applicants lock in a particular rate — fell nearly 60 percent from the same month last year, according to Black Knight, a data firm that tracks the mortgage market. Locks on mortgages for home purchases were down nearly 30 percent, while refinancing activity was 93 percent lower.
“I think we are all a little shocked at how abruptly interest rates went up,” she added. “In terms of buyer activity, we definitely see a lot of hesitancy. They are bummed because they feel they missed out.”