Mortgage Popularity Is Declining - Analysis And Reasons
Weeks ago Kickerdaily reported that the cost of the most common home loan in the U.S. went up again, giving homebuyers who are already facing the highest borrowing costs in 20 years another blow. That's because the mortgage popularity is declining and people is not asking for mortgages.
The typical 30-year fixed mortgage rate is now approaching the 7% barrier, more than doubling since the start of the year.
Significantly higher financing costs are driving purchasers off the market or to the sidelines, even as the increase in home prices slows down.
According to Lisa Sturtevant, an economist with Bright MLS in the mid-Atlantic region, "the mathematics just don't work for them anymore."
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Even for purchasers who still qualify, "that 7% barrier is somewhat of a mental obstacle for buyers," she claims. "They might be waiting to see if rates would drop."
Even though many people who wanted to buy have given up, some have found a way to get around the higher prices.
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30-year mortgages with fixed ratesAccording to mortgage juggernaut Freddie Mac, the average rate on a 30-year mortgage increased this week from 6.66% to 6.92%. The average rate at the same time last year was 3.05%.
Since April 2002, the 30-year rate hasn't been this high.
According to Sam Khater, chief economist at Freddie Mac, "we continue to see a tale of two economies in the data: strong job and wage growth is keeping consumers' balance sheets positive, while lingering inflation, recession fears, and housing affordability are driving down housing demand dramatically."
Without a doubt, the economy and property market will face challenges in the coming months.
According to Freddie Mac, the typical rate for a 15-year mortgage increased from 5.90% to 6.09% this week.
The average 15-year rate at this time last year was 2.30%.
Compared to a few months ago, when many buyers were compelled to make offers well over the asking price and waive stipulations in order to get a house, buyers today face a different reality.
Sales have declined as a result of rising rates, which make properties less affordable. According to the most recent statistics from the National Association of Realtors, sales decreased in August for the seventh consecutive month and were 20% lower than they were a year ago.
This week, the average rate on a five-year ARM increased to 5.81% from 5.36% last week.
The five-year ARM's average rate at this time last year was 2.55%.
ARMs begin with a time frame of fixed interest rates, usually lasting between three and ten years. Generally speaking, the rates are lower than they would be for a fixed-rate loan, such as the more well-known 30-year mortgage.
The rate on an ARM, however, changes after the first period expires, either going up or down depending on a benchmark like the prime rate.
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The case for raising mortgage rates even furtherIn an effort to slow down the economy, the Federal Reserve has raised its interest rate five times this year. However, consumer prices have continued to rise at an uncomfortably fast rate.
That indicates that there will be further rate increases, and while mortgage rates are not directly impacted by changes in the Fed's rate, they are.
Officials from the Fed stated at its most recent meeting that maintaining an aggressive course of restrictive monetary policies was the only approach to fighting inflation.
The meeting's minutes, which were just released, say that "several participants stressed that the cost of doing too little to bring inflation down was likely higher than the cost of doing too much."
Some buyers are trying to avoid the higher interest rates on loans by making their mortgage rate lock last less time.
A real estate agent in the Washington, D.C., area named Corey Burr says, "The popularity of adjustable-rate mortgages is growing very quickly because many borrowers think they will be able to refinance into a fixed-rate mortgage before their ARM adjusts."
He advises potential borrowers who are thinking about taking this path to look at adjustable-rate loans with starting periods of seven or ten years.
That will increase the likelihood that a refinancing opportunity will arise, according to Burr.
According to gloomy predictions made by the Economy Forecast Agency (EFA), the 30-year fixed-rate mortgage will be around 7% in January 2023 and will exceed 11% in the fourth quarter of 2023. Fannie Mae thinks that the average 30-year mortgage rate will be between 6.2% and 6.6% for the whole year.
What this implies is that a 3/5 ARM is a loan where the initial interest rate is fixed for the first three years and then changes every five years for the remainder of the loan's term.
We think that high mortgage rates will keep people from refinancing as much, so we expect originations to drop from $2.8 trillion in 2021 to $747 billion in 2022 and $310 billion in 2023.
A weekly survey by the Mortgage Bankers Association shows that mortgage activity has again gone down, even though rates have gone up.
Applications for both purchases and refinances decreased by 2% week over week.
Applications for refinances are down 86% from last year, while those for purchase loans are down 39%.
At 11.7%, says MBA's chief economist Mike Fratantoni, the number of applications for ARMs stayed "very strong."