Mortgage rates increased again this week, making it pricier for homebuyers to purchase and giving sellers more reason to hold on to their current homes.
The rate on the average 30-year fixed mortgage jumped to 6.57%, up from 6.39% the week prior, according to Freddie Mac on Thursday, as debt limit concerns bled into the Treasury market. Rates have see-sawed between 6% and 7% for the last eight months, with few signs of edging down.
The uptick in rates, along with elevated prices, weakened affordability even more for homebuyers. At the same time, many homeowners won't budge on listing, worsening the inventory-strained market.
“People are just now coming to realize that mortgage rates in the 3s, 4s, and probably 5s aren’t going to happen,” Monte Miner, real estate agent at Ironwood Fine Properties, told Yahoo Finance. “This is just going to be the new normal.”
Debt ceiling drama and rates
Rates tilted higher, following the yield on the 10-year Treasury, which hit its highest point since March this week as negotiations in Congress dragged on over raising the debt ceiling.
While Zillow economists argue that chances of a US default are “very unlikely,” if it happened, rates could surge to 8.4% by September.
The event would push the housing market back into a “deep freeze,” the economists said. Miner added that such a scenario would push homebuyers back to the sidelines.
“It’ll be a shock like we experienced last year when rates went from 3% to 7%,” he said.
Demand ebbs
As rates ticked higher — and inventory woes continued — activity among buyers waned.
The volume of mortgage applications to purchase a home dropped 4% on a seasonally adjusted basis last week from the previous one, the Mortgage Bankers Association (MBA) found, and was 30% lower than the same week a year ago.
“Since rates have been so volatile and for-sale inventory is still scarce, we have yet to see sustained growth in purchase applications,” Joel Kan, MBA’s vice president and deputy chief economist said in a statement.
Interest in government loans backed by the Federal Housing Administration and Veterans Affairs – which typically attract first-time and moderate to low-income buyers — recorded a brief uptick in demand.
The problem, though, is finding homes within an entry-level buyer’s price range, Miner said, especially as home prices remain elevated due to scarce resale listings on the market.
“There’s a lot of activity in Phoenix, but it’s a challenge. I have a buyer that recently qualified for $360,000, but it’s gonna take time to find something in that price range,” added Miner. “The reality is inventory is tight, the cost of homeownership is up, and it feels like it’s not going down anytime soon.”
Resale inventory remains scarce
Elevated rates have also kept some homeowners from listing, aggravating the inventory crisis. At least 83% of homeowners have mortgage rates below 5%, a recent analysis from First American Chief Economist Mark Fleming revealed.
“There’s more demand than inventory at this point,” Miner said. “But buyers are still out there, there’s more interest in new construction now.”
That trend has been reflected in several reports over the past week.
Existing home sales dropped in April as would-be buyers were challenged by lack of properties available to buy, while new home sales increased during the month, a sign that more buyers are shifting toward new construction.
Builders have been capitalizing on the shortage and luring buyers with better rates.
“Builders can’t let something sit on the market, they have to sell those homes,” Miner said. “The latest has been lower interest rates. I’m able to get people that purchase new homes into a rate under 5%.”
Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
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