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Mortgage rates are again on the rise, making homebuyers uneasy with current market conditions

Mortgage rates recently surged closer to 7% this week, further worsening housing conditions for buyers. The rate on the 30-year fixed mortgage increased to 6.79% from 6.57% the week prior, according to Freddie Mac, on expectations the Federal Reserve will hike interest rates again in June. For the past eight months, rates remained between 6% and 7%.

Elevated rates—along with still-high home prices—have been a blow for homebuyer affordability and have convinced many homeowners to delay listing—worsening inventory conditions in a supply-starved market. On the heels of cooling inflation, the Federal Reserve announced on May 3, a 25-basis-point increase to its benchmark short-term interest rate. The Fed’s May meeting marks what could be the last increase we see for the time being.

The central bank had signaled that it may soon be time to pause on rate hikes. But this pause will depend on income inflation data. The next step for the Federal Reserve would be to hold rates where they are for an extended period of time in order to bring inflation down to its 2% target. As long as inflation continues to trend downward, experts say a pause in rate hikes from the Fed could bring some stability to today’s volatile mortgage market.

This sentiment, however, isn’t shared by everyone. Some experts are convinced that the Fed may hike again interest rates in June. In a recent statement, Freddie Mac Chief Economist Sam Khater said: “Although there has been a steady flow of purchase demand around rates in the low to mid 6% range that demand is likely to weaken as rates approach 7%.” Khater noted that a “buoyant economy” has convinced many market watchers that more Fed hikes are on the way.

The share of applications to purchase a home slid 3% last week from a week earlier, according to the Mortgage Bankers Association’s survey. Overall, buyer demand is 45% lower than the same week one year ago. A separate study by real estate analytics company Altos Research found the number of pending sales that should be complete in June and July sat at 398,000 last week, unchanged from the previous week. That’s even as inventory rose 2% or the week ending May 29.

30-year Fixed Mortgage Rates

Source: Freddie Mac

It is clear that mortgage rates remain well above where they were a year ago. Fewer buyers are willing to jump into the housing market, driving demand down and causing home prices in some regions to ease but that’s only part of the home affordability equation. The most frequently used loan is a 30-year fixed mortgage. A 30-year fixed mortgage will often have higher interest rates than a 15-year fixed rate mortgage—but also a lower monthly payment. Although one will pay more interest over time—one is paying off the loan over a longer timeframe. The 30-year fixed mortgage may be a good option for lower monthly payments. The average rate for a 15-year fixed mortgage is 6.49%, which is an increase of 2-basis-points compared to a week ago. Compared to a 30-year fixed mortgage, a 15-year fixed mortgage with the same loan value and interest rate will have a bigger monthly payment.

Mortgage rates were historically low throughout most of 2020 and 2021 but increased steadily throughout 2022. Now, mortgage rates are roughly twice what they were a year ago, pushed up by persistently high inflation. By raising interest rates, the Fed makes it more expensive to borrow money and more appealing to keep money in savings, suppressing demand for goods and services. Mortgage interest rates don’t move in lockstep with the Fed’s actions in the same way that rates for a home equity line of credit (HELOC) do. But they respond to inflation. As a result, cooling inflation data and positive signals from the Fed will influence mortgage rate movement more than the most recent 25-basis-point rate hike.


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