Mortgage rates continue to rise and approach 6%

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Mortgage rates continued their upward momentum this week and show no signs of slowing as they approached the 6% mark, according to data released Thursday by Freddie Mac.

Fixed-rate mortgage rates have jumped since the start of the year, increasing by more than two percentage points. The higher borrowing costs are part of a campaign by the Federal Reserve to raise interest rates to calm inflation, and the fallout on the housing market was immediate.

In the past month alone, there have been fewer home sales, a drop in first-time buyers and sudden layoffs across the industry, signs that air may be escaping from the overheated housing market as higher rates lower the demand for housing.

“Real estate is very sensitive to increases in mortgage rates, so higher rates will pull back sales and further slow the housing market,” said Lawrence Yun, chief economist at the National Association of Realtors. “Housing is a major contributor to the US economy, and we’ve already seen builders cut production and slow sales. Hopefully higher rates won’t tip the US into a recession.

The real estate cooling has had a chilling effect on the mortgage industry. JPMorgan Chase is laying off hundreds of employees this week and reassigning hundreds more. Industry heavyweight Wells Fargo laid off more than 100 staff in its home loan business after a drop in revenue in the first quarter. Other lenders such as Pennymac, LoanDepot and Guaranteed Rate have also downsized.

Rising rates are also shaking up real estate companies. Real estate brokerage Compass recently announced the layoff of 10% of its employees as well as a pause in hiring and expansion. Real estate brokerage Redfin also laid off 8% of its staff.

“The real estate industry is one of the most competitive, so any downturn quickly leads to disruption in businesses,” Yun said.

Fed raises interest rates by largest amount since 1994 to fight inflation

The 30-year fixed-rate mortgage rose to 5.81% from 5.78% a week ago, according to Freddie Mac. It was 3.02% a year ago. The 15-year fixed-rate mortgage averaged 4.92%, down from 4.81% last week. A year ago, it was 2.34%. The five-year adjustable rate averaged 4.41%, up from last week when it averaged 4.33%. A year ago, it was 2.53%.

Earlier this month, the Federal Reserve raised interest rates by three-quarters of a percentage point in a bid to tame inflation – its biggest increase since 1994. It was the third of seven hikes expected this year. Although the central bank does not set mortgage rates, its own rate-setting activity affects them indirectly.

Despite higher mortgage rates, mortgage applications rose for the second straight week in the week ending June 12, according to the Mortgage Bankers Association (MBA).

“However, buying activity was still 10% lower than a year ago as inventory shortages and rising mortgage rates dampen demand,” said Joel Kan, associate vice president. economic and industrial forecasts for the MBA, in a press release.

Kan said the average loan size is just over $420,000, well below its peak of $460,000 earlier this year, and is potentially a sign that home price growth is slowing.

Harrison Beacher said his prospective homebuyer clients on budgets under $450,000 had a “visceral reaction” to the added costs of a home loan with a 6% mortgage rate.

“The difference in payment of a few hundred dollars with a higher rate has a much greater impact on entry-level price buyers,” said Beacher, managing partner of Coalition Properties Group with Keller Williams Capital Properties at DC. “These buyers pulled out of the market and decided to continue renting.

Since mortgage rates began to rise in early 2022 and then rose last week by more than half a percentage point to their highest level since 2008, homebuyers have increasingly felt the pinch of their expected housing payments. And yet, the bottom has not completely fallen on the housing market. Instead, there is a slowdown in sales and demand.

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“The combination of rising interest rates, inflation and house prices means that home buyers have lost almost 50% of the buying power they had six months ago,” he said. said David Howell, executive vice president and chief information officer of McEnearney Associates in McLean, Va. “With any other product that has seen this kind of dramatic change, demand would drop, but that hasn’t happened. »

Over the past six weeks, contracts signed in the DC area are down about 15-20% from the same time last year, “but it’s not that steep a drop,” a- he declared.

Howell said 2021 and 2020 are two of the most abnormal real estate markets ever. Today’s housing market is comparable to 2019, except with an even lower inventory of homes for sale and higher mortgage rates, he said.

Still, mortgage rates aren’t expected to fall in the near future, nor is there evidence that prices are falling either, Beacher said. Instead of a general price reduction, the pace of appreciation is expected to slow, although some individual sellers are lowering their prices today if their home hasn’t sold.

Homebuyers who were looking at the top of their budget when rates were 3.5-4% could face a housing payment above their comfort level, said Carolyn Sappenfield, real estate agent at Re/Max Realty Services. in Bethesda, Maryland.

“If you don’t have to move and the payment is too high, you might want to step back and wait to see what happens with the market,” Sappenfield said.

First-time home buyers and those looking for entry-level housing need to be flexible about where and what type of home they buy, Beacher said.

What the Fed’s interest rate hike means for mortgages

“Your first home isn’t your forever home,” Beacher said. “It’s not impossible to buy, but you might not be able to buy exactly what you want. The dynamic is that renting isn’t cheaper than buying now and your rent will likely go up too.

The condominium market in DC, especially for older buildings without outdoor space, is softer than the rest of the housing market, Howell said. This may offer an opportunity to some first-time buyers.

For sellers, Beacher recommends pricing their homes appropriately and considering offering closing credits to help buyers lower their interest rate to make their payment more affordable.

“I train all of my customers to stay in the game if they can afford to buy,” Beacher said.

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