Mortgage rates finally ceased the upward march toward 8% this week, but the humble dip didn't provide any meaningful relief to homebuyers.
The average rate on the 30-year fixed mortgage decreased to 7.76% from 7.79% the previous week, Freddie Mac reported Thursday, breaking seven weeks in a row of increases. Still, rates have remained above 7% for 12 straight weeks, a stretch not seen since mid-2001.
Record high home prices and elevated mortgage rates have been a one-two gut punch for homebuyers, sending their monthly mortgage payment soaring.
"Today’s buyers face scarce for-sale inventory, still-high listing prices, and multi-decade high mortgage rates, so any potential relief from climbing housing costs is welcomed," Hannah Jones, economic research analyst at Realtor.com, said in a press email.
'Cost of carrying a mortgage is higher'
Many homebuyers refuse to move forward with these rates. For others, they have no choice: Rates have made their theoretical monthly payment too high to even qualify for a mortgage.
The number of buyers applying for a mortgage decreased to the lowest level since 1995 — or four presidents ago — the Mortgage Bankers Association reported Wednesday.
Of the brave buyers still out there, they’re turning to adjustable-rate mortgages, which offer a more affordable rate initially before adjusting higher or lower based on a rate index after a certain fixed period. For instance, the rate on the five-year ARM, which features a fixed rate period for five years, averaged 6.77% last week. Applications for that home loan jumped by 10% week over week.
Read more: What is an adjustable-rate mortgage? Is an ARM the way to go in 2023?
"People today are doing adjustable rate mortgages, but [still] the cost of carrying a mortgage is higher," JPMorgan Chase CEO Jamie Dimon said in an interview this week with Yahoo Finance Executive Editor Brian Sozzi.
Buyers are also taking an indirect hit from mortgage rates. Many homeowners have decided against selling in a high-rate environment when they currently have a low rate on their current mortgage. The vast majority of homeowners with a mortgage have a 5% mortgage rate or lower.
Read more: Mortgage rates at 20-year high: Is 2023 a good time to buy a house?
"They locked in a lot of fixed-rate financing, particularly in mortgages, which is like 70% of consumer borrowing," Dimon said.
That dynamic has kept the number of previously owned homes on the market very low, propping up home prices even though demand is lukewarm.
For example, home values posted another record high in August, according to the latest data this week, largely because of the inventory woes plaguing the market.
'Lowest fixed rate possible'
But the shortage of resale inventory has only been a boon this year for homebuilders, largely because they're often the only game in town. They also are dangling appetizing incentives. One of the tastiest: mortgage rate buydowns.
That’s where the builder pays upfront costs to either temporarily or permanently reduce the rate on a mortgage. For a lot of big-time builders that can lean on their financing arms or mortgage lending partners, they can buy down the rate for the entire life of the loan. They often can lock that lower rate for a period of time to give buyers more peace of mind.
So instead of financing at 7.76%, buyers of new homes can get into their pristine houses with up-to-date countertops and cabinets by paying 2 percentage points less than that. That’s a big difference.
Read more: How to buy a house in 2023
"What we've been really focused on is giving the consumer the lowest fixed rate possible every week," LGI CEO Eric Lipar said this week on the company’s earnings call. "And what does that involve? Over the last couple of quarters is really paying two or three discount points if you will, to get the lowest rate possible on a week to week basis."
For reference, the monthly mortgage payment on a $400,000 home with 20% down at 7.76% is $2,295. If that rate is 5.76%, the monthly payment is $426 lower at $1,869.
A swath of other homebuilder executives on earnings calls in the last week have credited the buydown strategy for helping entry-level buyers make the math work for their budgets and to qualify at higher rates.
"As rates continue to increase, we're using more of it to get people qualified than we were maybe two quarters ago," Meritage Homes CEO Phillippe Lord said on the company's earnings call.
"The only thing I would add is in all communities, it's a marketing tool, right?" Meritage Homes CFO Hilla Sferruzza said. "So, it's critical to advertise that to get them in the door."
Janna Herron is the personal finance and real estate editor for Yahoo Finance. Follow her on Twitter @JannaHerron.