Mortgage rates drop as fears over US economy loom

The 30-year fixed-rate mortgage averaged 5.30% in the week ending July 28, down from 5.54% the previous week, according to Freddie Mac. This is still much higher than at the same time last year, when it was 2.80%.

Rates rose sharply at the start of the year, reaching a high of 5.81% in mid-June. But since then, worries about inflation and the possibility of the US economy entering a recession have made them more volatile.

Home buying demand continues to fall as buyers face higher rates, record property prices, increased risk of recession and falling consumer confidence, Sam Khater said , chief economist at Freddie Mac.

“It’s clear that over the past two years the combination of the pandemic, record mortgage rates and the ability to work remotely have spurred increased demand,” Khater said. “Now, as the market adjusts to a higher rate environment, we are seeing a period of deflated selling activity until the market normalizes.”

Mortgage rates fell as investors anticipated another 75 basis point rate hike from the Federal Reserve at its meeting on Wednesday. This was the second hike of this size in as many months.

The Federal Reserve does not directly set the interest rates that borrowers pay on mortgages. Instead, the mortgage rates tend to follow 10-year US Treasuries, which fell last week ahead of the central bank meeting. But they are indirectly impacted by the Fed’s efforts to control inflation.

The Fed also said on Wednesday that this could moderate its pace of interest rate hikes in the coming months.

“The statement was welcomed by financial markets as a sign that the Fed expects inflation to slow more materially, requiring a less aggressive response,” said George Ratiu, head of economic research at . “These measures should keep upward pressure on borrowing costs, including mortgage rates, going forward.”

Borrowing costs are rising

Consumers will feel the impact of the Fed’s hike over the next two months, Ratiu said, as credit card interest rates and new auto loan rates rise over the next billing cycles.

How much house can I afford?

“Borrowers who have adjustable rate mortgages — or those who expect to take one out soon — can expect to see rates rise,” he said.

The higher costs of financing a home are already having an impact. Buyers are finding homes even less affordable as inflation takes more of their income and the rising cost of borrowing has reduced their purchasing power.

A year ago, a buyer who staked 20% on a home with a median price of $390,000 and financed the rest with a 30-year fixed-rate mortgage at an average interest rate of 2.80% had a monthly mortgage payment of $1,282, according to the figures. by Freddie Mac.

Today, a homeowner buying a house at the same price with an average rate of 5.30% would pay $1,733 per month in principal and interest. That’s $451 more every month.

Buyer demand cools

Due to the high cost of buying a home, buyer demand has slowed and many sellers are seeing their properties stay on the market longer.

“For those who are motivated to sell, price reductions become a go-to strategy,” Ratiu said. “We can expect the rebalancing of housing markets to continue and accelerate, especially as we look to the fall and winter seasons.”

The Federal Reserve’s measures aim to curb inflation by reducing demand.

While home prices continued to climb to record highs in June, the number of sales is down.

Mortgage applications are also down, falling last week for the fourth consecutive week, according to the Mortgage Bankers Association.

“Increased economic uncertainty and consumer affordability issues are deterring households from entering the market, leading to a drop in buying activity that is near lows last seen in early the pandemic,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting.

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