Mortgage rates increased this week after more than a month of straight declines, prompting rate-sensitive buyers to put off their purchasing plans once more.
The rate on the average 30-year fixed mortgage rose to 6.39% from 6.27% the week prior, according to Freddie Mac. Rates had slipped nearly a half-point since early March, but edged higher this week after several Federal Reserve members said further interest rate hikes may be needed to tame inflation.
The uptick in rates triggered some first-time buyers who came back to the market briefly to retreat once again, while homeowners remain reluctant to sell, exacerbating the acute inventory shortage this spring season.
“We had a surge of buyers probably a month and a half ago, but that’s waned,” Sean Dycus, a realtor at Mainstreet Properties, told Yahoo Finance. "Buyers are still out there, but we’re going to have less listings coming on. That’s the big prediction: Homeowners are going to hold back from listing this year because of rates.”
Buyers retreat as rates surge
Would-be buyers were quick to pull back from the market as rates climbed last week, a sign that affordability remains a primary concern again this year.
The volume of purchase applications decreased 10% from one week earlier, the Mortgage Bankers Association survey for the week ending April 14 found. Overall, purchase demand was 36% lower than a year earlier on a seasonally unadjusted basis.
“Affordability challenges persist and there is limited for-sale inventory in many markets across the country, so buyers remain selective on when they act,” Joel Kan, MBA’s deputy chief economist, said in a statement.
He noted that a 10% drop in applications for mortgages backed by the Federal Housing Administration — which have less stringent requirements — and the increase in the average purchase loan size to its highest level in a month signal that “first-time buyers have pulled back.”
At the same time, investors or buyers on the higher-end of the market may also have some difficulties qualifying for loans this spring because the spread between jumbo loans and conforming 30-year fixed rate loans remains tighter than a year ago, meaning that lending standards for these loans are stricter.
“As banks reduce their willingness to hold jumbo loans, we expect this narrowing trend to continue,” Kan said.
Inventory challenges remain
As mortgage rates pick up, homeowners are becoming even more hesitant to sell and give up their current mortgage rate. That’s evident in new listing data.
Only 66,000 single-family homes were newly listed on the market this week, Altos Research found, with 25% of those already under contract. By comparison, there were 100,000 new listings with 30% under contract immediately a year ago at this time.
“Demand is still strong,” Doug Duncan, senior vice president and chief economist at Fannie Mae, told Yahoo Finance. “There just isn’t the supply.”
The lack of inventory available means that buyers looking for some price relief may have a harder time finding deals with sellers newly emboldened.
For instance, builders are pulling back their price reductions as the selling season approaches, according to the National Association of Home Builders,
At least 30% of builders reduced their home prices in April, down from 31% in March and February, 35% in December, and 36% in November. The average price reduction was 6% in April, down from 8% in December.
“While it varies from region to region, home prices at the national level may fall 1% or 1.5% by the end of the year, so not much,” Duncan said.
Still, 59% of builders are using incentives to draw in buyers, a potential opening for opportunistic buyers still in the market.
“Right now, investing in a new house is worth considering, you’ll get incentives from the builder and potentially a better rate on the house,” Dycus said. “It can be a bit harder to get deals on existing homes, or something you really like, especially if competition is up.”
Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
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