Mortgage rates continued their upward momentum this week and show no signs of slowing down as they ticked up closer to the 6 percent mark, according to data released Thursday by Freddie Mac.
Rates for fixed-rate mortgages have surged since the start of the year, rising more than two full percentage points. The higher borrowing costs are part of a campaign by the Federal Resserve to raise interest rates as a way to cool inflation, and the fallout in the housing market has been immediate.
Just in the past month, there have been fewer home sales, a decline of first-time buyers and sudden industry layoffs, signs that the air may be leaking out of the overheated housing market as higher rates drive down housing demand.
“Real estate is very sensitive to mortgage rate increases, so the higher rates will pull back sales and slow the housing market further,” said Lawrence Yun, chief economist at the National Association of Realtors. “Housing is a major contributor to the U.S. economy, and we’ve already seen builders cut back production and sales slow. Let’s hope higher rates don’t tip the U.S. into a recession.”
The housing cool-down has had a chilling effect on the home-lending industry. JPMorgaan Chase is laying off hundreds of employees this week and reassigning hundreds more. Industry heavyweight Wells Fargo let go of more than 100 employees in its home-lending business following a drop in revenue in its first quarter. Other lenders such as Pennymac, LoanDepot and Guaranteed Rate have also reduced their workforces.
The rise in rates is also shaking up real estate companies. Compass real estate brokerage recently announced a layoff of 10 percent of its employees along with a pause on hiring and expansion. Redfin real estate brokerage also let go of 8 percent of its staff.
“The real estate industry is one of the most fiercely competitive out there, so any downturn quickly leads to a shakeout in companies,” Yun said.
The 30-year fixed-rate mortgage edged to 5.81 percent, up from 5.78 percent a week ago, according to Freddie Mac. It was 3.02 percent a year ago. The 15-year fixed-rate mortgage averaged 4.92 percent, up from 4.81 percent last week. A year ago, it was 2.34 percent. The five-year adjustable rate averaged 4.41 percent, increasing from last week when it averaged 4.33 percent. A year ago, it was 2.53 percent.
Earlier this month, the Federal Reservehiked interest rates by three-quarters of a percentage point in an effort to tame inflation — its sharpest 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 does indirectly affect them.
Despite higher mortgage rates, mortgage applications increased for the second consecutive week during the week that ended June 12, according to the Mortgage Bankers Association (MBA).
“However, purchase activity was still 10 percent lower than a year ago, as inventory shortages and higher mortgage rates are dampening demand,” Joel Kan, associate vice president of economic and industry forecasting for the MBA, said in a statement.
Kan said the average loan size is just over $420,000, well below its $460,000 peak earlier this year, and is potentially a sign that home price growth is moderating.
Pressure on home buyers
Harrison Beacher said his potential home-buying clients with a budget below $450,000 had a “visceral reaction” to the additional costs of a home loan with a 6 percent mortgage rate.
“The few hundred dollars’ difference in payment with a higher rate has a much bigger impact on buyers at an entry-level price point,” said Beacher, managing partner of the Coalition Properties Group with Keller Williams Capital Properties in D.C. “Those buyers pulled out of the market and decided to keep renting.”
Since mortgage rates began rising in early 2022 and then spiked last week by more than a half percentage point to their highest level since 2008, home buyers have increasingly felt the pinch in their expected housing payments. And yet the bottom hasn’t completely fallen out of the housing market. Instead, there’s a slowdown in sales and demand.
“The combination of rising interest rates, inflation and home prices mean that home buyers have lost close to 50 percent of the buying power they had six months ago,” said David Howell, executive vice president and chief information officer for McEnearney Associates in McLean, Va. “With any other commodity that experienced that kind of dramatic shift, demand would plummet, but that hasn’t happened.”
Over the past six weeks, signed contracts in the D.C. region are down about 15 to 20 percent compared with the same time last year, “but that’s not that steep a drop,” he said.
Howell said that 2021 and 2020 are two of the most abnormal real estate markets ever experienced. Today’s housing market is comparable to 2019, except with even lower inventory of homes for sale and higher mortgage rates, he said.
Still, there’s no expectation that mortgage rates will go down in the near future, and there’s also no evidence that prices will drop either, Beacher said. Instead of an across-the-board price reduction, the pace of appreciation is anticipated to slow, although some individual sellers are dropping their prices today if their home hasn’t sold.
‘Wait and see’
Home buyers who were looking at the top of their budget when rates were 3.5 to 4 percent may be facing a housing payment above their comfort level, said Carolyn Sappenfield, a real estate agent with Re/Max Realty Services in Bethesda, Md.
“If you don’t have to move and the payment is too high, you may want to take a step back and wait and see what happens with the market,” Sappenfield said.
First-time buyers and those looking for entry-level housing need to be flexible about location and the type of housing they buy, Beacher said.
“Your first house isn’t your forever house,” Beacher said. “It’s not impossible to buy, but you just may not be able to buy exactly what you want. The dynamic is that renting isn’t cheaper than buying now and your rent is likely going up, too.”
The condo market in D.C., especially for older buildings without outdoor space, is softer than the rest of the housing market, Howell said. That may offer an opportunity for some first-time buyers.
For sellers, Beacher recommends pricing their home appropriately and considering offering closing-cost credits to help buyers buy down their interest rate to make their payment more affordable.
“I coach all of my clients to stay in the game if they have the means to buy,” Beacher said.