Mortgage Rates Hit Highest Levels In Two Decades — 4 Things This Means For Homebuyers
Mortgage rates hit their highest point in more than 20 years, with the 30-year fixed-rate mortgage averaging 7.09% on Aug. 17, according to Freddie Mac. In turn, the homeownership dream remains out of reach for many Americans — many have been left on the sidelines for several months.
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“The economy continues to do better than expected and the 10-year Treasury yield has moved up, causing mortgage rates to climb,” Sam Khater, Freddie Mac’s chief economist, stated in a press release. “The last time the 30-year fixed-rate mortgage exceeded seven percent was last November. Demand has been impacted by affordability headwinds, but low inventory remains the root cause of stalling home sales.”
To put this into perspective, one year ago, the 30-year fixed mortgage rate averaged 5.15% (for the week ending Aug. 18, 2022). Three years ago, it averaged 2.99% (for the week ending Aug. 20, 2020), according to Freddie Mac data.
So what does the current rate situation mean for homebuyers?
Affordability Crisis
The jump in mortgage rates is akin to a 39% drop in home affordability, said Ted Rossman, senior industry analyst at Creditcards.com.
“In other words, if you could have afforded a $375,000 house when rates were at 3%, you can only afford a $230,400 house now,” he said.
Higher Prices and Low Inventory
“Of course, home prices have risen sharply in recent years, so this is a double-whammy for homebuyers, especially first-time buyers,” added Rossman.
Rossman suggested while at least trade-up buyers probably have more equity to trade in, many are feeling the “golden handcuffs” of their existing low mortgage rates.
In fact, a recent Redfin report noted that 82.4% of homeowners have a rate below 5%, which is making them reluctant to sell their home and find themselves with a higher mortgage.
“This is contributing to low inventory which is contributing to high prices,” Rossman said. “People don’t want to move because they might be swapping a 3% or 4% rate for a 7% rate, plus the new house would cost more.”
Peter C. Earle — economist for the American Institute for Economic Research — agreed, saying that with the sudden drop in housing turnover and rates at 21-year highs, “we’re talking about a generation of people who’ve only known lower, and in most cases much lower rates.”
“So this spike in mortgage rates could serve as the catalyst for housing prices to decline broadly, especially if the US economy slows substantially.”
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Federal Reserve Rates Might Continue To Increase, Triggering Higher Mortgage Rates
Rossman noted that while mortgage rates don’t directly track Fed actions — they tend to move more in tandem with 10-year Treasuries — the Fed is an important part of the macro landscape.
“Barring an unexpected economic meltdown — which wouldn’t be good for the housing market, either — mortgage rates should remain elevated for the foreseeable future,” he said. Rossman continued to say that while rates are expected to fall a bit next year, it’s reasonable to think the average 30-year fixed mortgage rate could be around 6% in late 2024.
What Should Homebuyers Do?
Ralph DiBugnara, president of Home Qualified and senior vice president at Cardinal Financial, said that with inflation cooling down and rates seemingly settling in, it will always make sense to buy a home as long as it fits your financial budget.
“Homes are more expensive now and cost more with inflated interest rates. But, if and when we have an interest rate deduction, we will see a feeding frenzy most likely to buy homes again which will cause prices to rise even further,” said DiBugnara.
“If you buy now you can always refinance for a lower rate later and if home prices continue to trend upward you will see an increase in your home’s equity because of a potential hot buyers market.”
On the other hand, some experts say that now might be the time to reconsider owning versus buying.
“My wife and I sold our house a month ago and are renting for now,” said Jay Zigmont — PhD, CFP and founder of Childfree Wealth.
“We looked at the market and decided to take a profit on our house and rent for the foreseeable future. Renting is a good option for many and provides increased flexibility. It may be time for people to rethink the math of renting vs. buying.”
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This article originally appeared on GOBankingRates.com: Housing Market 2023: Mortgage Rates Hit Highest Levels In Two Decades — 4 Things This Means For Homebuyers
