Rising Mortgage Rates Dampen Housing Market

The Numbers

This surge in rates is partly due to a recent downgrade in the U.S. government's debt. At the start of August, the 30-year mortgage averaged at 7.09%, while FHA-backed loans averaged at 7.02%. As a result, overall mortgage applications have declined for three consecutive months.

Both home purchases and refinancing have experienced a decrease in demand. Consequently, this has pushed down the market-composite index - a metric used to measure mortgage application volume - according to the Mortgage Bankers Association (MBA) report released on Wednesday.

For the week ending August 4, the market index fell by 3.1% to 194.5 from the previous week. A year ago, the index stood at 279.8.

Key Details

The rise in mortgage rates is discouraging potential homebuyers. The purchase index, which measures mortgage applications for home purchases, has fallen by 2.7% compared to last week.

Additionally, homeowners are showing less interest in refinancing due to the heightened rates. The refinance index has declined by 4%.

In the case of homes sold for $726,200 or less, the average contract rate for a 30-year mortgage was 7.09% for the week ending August 4. This is an increase from the previous week's rate of 6.93%, as reported by the MBA. Consequently, the 30-year mortgage is currently at its highest level since November 2022.

For jumbo loans (i.e., those for homes sold for over $726,200), the rate for the 30-year mortgage rose to 7.04% from 6.89% in the previous week.

Meanwhile, the average rate for a 30-year mortgage backed by the FHA reached 7.02%, up from last week's rate of 6.85%. This rate marks the highest level in 21 years.

Furthermore, the 15-year mortgage rate increased to 6.51% from last week's rate of 6.39%.

Lastly, the rate for adjustable-rate mortgages climbed to 6.36% compared to last week's rate of 6.18%.

The Impact of Rising Interest Rates on Home Buyers

Rising interest rates, fueled in part by a recent downgrade of the nation’s debt, are making it even more expensive for home buyers to enter the market. This has caused many prospective buyers to reconsider their plans and put their home purchase on hold.

The Current Dilemma

Some home buyers may view the current rate environment as temporary and opt to secure a mortgage at a higher rate with hopes of refinancing in the future. However, this strategy is becoming increasingly risky given the limited availability of homes for sale and soaring prices. As a result, many buyers are being forced to pause their search for a new home.

The Silver Lining

While higher rates may be causing some challenges, they could be beneficial for the overall U.S. economy in the near-term. The housing market is starting to cool down due to these higher mortgage rates, which may help bring down inflation. According to a report from the San Francisco Fed, slowing housing markets can contribute to a decrease in shelter inflation and subsequently lower overall inflation over the next 18 months. This could prompt the U.S. Federal Reserve to take action to tame inflation sooner and potentially halt further interest rate hikes.

Insight from the MBA

Joel Kan, Deputy Chief Economist and Vice President at the Mortgage Bankers Association (MBA), points out that last week's rate increase was influenced by Fitch ratings downgrading U.S. government debt. He also notes that rates rose across all loan types in their survey. Additionally, Kan highlights the challenges faced by home buyers, including not only high rates but also a limited inventory of homes for sale. As a result, the purchase index has seen a decline for four consecutive months.

Market Response

In response to these developments, the yield on the 10-year Treasury note BX:TMUBMUSD10Y reached above 4% during early morning trading on Wednesday.

In conclusion, the current rise in interest rates is posing significant challenges for home buyers. While this may temporarily impact the housing market, it could ultimately contribute to a slowdown in inflation and, in turn, lead to a stabilization of interest rates.