Potential buyers are hesitant to enter the housing market despite falling mortgage rates. Mortgage applications decreased by 2% in the week ending December 2 compared to the previous week. The average loan size for a purchase application is at its lowest level since January 2021. This reluctance is due to the pandemic-era housing boom, combined with high inflation and volatile mortgage rates, which are causing both buyers and sellers to adopt a wait-and-see approach.
According to Sam Khater, Freddie Mac's chief economist, mortgage rates have declined by three-quarters of a point over the past four weeks, which is the largest decline since 2008. This decline is a positive sign, but homebuyer sentiment remains low, and there has been no major increase in purchase demand despite the lower rates.
What’s happening with mortgage rates?
As of December 8, 2022, the average rate for a 30-year fixed mortgage is 6.33%, down from 6.49% the previous week. However, compared to a year ago when it averaged 3.1%, the fixed-rate mortgage has more than doubled. This significant increase in mortgage rates has been a cause for concern among potential buyers.
Bob Broeksmit, president and CEO of the Mortgage Bankers Association, explains that despite the decline in mortgage rates since October, prospective homebuyers are still delaying their purchasing decisions. This hesitation is reflected in the average loan size for a purchase application, which is currently at its lowest level in nearly two years.
How are mortgage rates affecting affordability?
Currently, the qualifying income for a median-priced home exceeds the typical family's earned income. However, housing affordability has improved by about 8% in the last four weeks as mortgage rates have moved closer to 6%. If inflation continues to slow down, Nadia Evangelou, senior economist and director of real estate research for the National Association of Realtors, predicts that mortgage rates may stabilize near 6% in 2023. This stabilization would make housing more affordable for many buyers, with the typical family earning about $1,000 more than the income needed to purchase a mid-priced home.
What is holding homebuyers back?
Buyers have been hesitant due to fears of a recession and high mortgage rates. Many people have been priced out of the market, and small drops in interest rates have not made a significant difference. Affordability remains a major constraint, as home prices have increased by over 40% nationally in the past three years. The rise in home prices has drastically increased the income required to qualify for a median-priced home, making homeownership less attainable for many.
Can homebuyers time mortgage rates?
While prospective buyers may be tempted to time the market and jump in when rates dip, timing rates accurately is challenging. Lisa Sturtevant, chief economist at Bright MLS, advises buyers to shop around for rates and get quotes from multiple lenders. In the current market, there is a lot of variability in rates, terms, and mortgage products, so it's essential to explore different options.
What’s happening with the housing market?
Pending home sales have decreased for the fifth consecutive month, with three out of four U.S. regions recording month-over-month declines. High mortgage rates have made it difficult for homebuyers, especially in the West region where the combination of high rates and expensive home prices has negatively impacted the market. Total housing inventory has also decreased compared to last year, further contributing to the challenges faced by buyers.
Are home prices still rising?
Although home prices remain high, the rate of increase has slowed down compared to the previous year. In October 2022, home prices rose by 6.6% year-over-year, compared to a 13% increase in the previous October. While home price growth has slowed, it marks the longest-running streak of year-over-year increases on record.
In conclusion, the housing market is experiencing a slowdown as buyers and sellers navigate the impact of high mortgage rates, increasing home prices, and limited affordability. While there have been recent declines in mortgage rates, buyer sentiment remains low, and economic uncertainty continues to affect the demand for homes. It is crucial for prospective buyers to carefully consider their options and consult multiple lenders to find the best mortgage rates available.