During a season when homebuying activity is typically in full swing, the summer housing market is stifled by an affordability crisis. A two-and-a-half-point surge in mortgage rates throughout the first half of the year, paired with rapid home price growth, drove average housing payments to record highs. At the same time, many younger millennials and Gen Zers are aging into the first-time homebuyer pool, and the financial strain may leave some priced out of homeownership.
But in the first week of July, home shoppers caught an unexpected break. The average 30-year fixed mortgage rate dropped to 5.3% after peaking at 5.81% in mid-June, according to Freddie Mac. Rates dropped significantly on July 7 across all mortgage terms, both fixed and adjustable:
— 30-year fixed: 5.3% with 0.8 point (down from 5.7% a week ago, up from 2.9% a year ago).
— 15-year fixed: 4.45% with 0.8 point (down from 4.83% a week ago, up from 2.2% a year ago).
— 5/1-year adjustable: 4.19% with 0.4 point (down from 4.5% a week ago, up from 2.52% a year ago).
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Don’t pop the champagne (or nonalcoholic sparkling beverage of choice) just yet, because this small victory is overshadowed by its underlying cause:
“Over the last two weeks, the 30-year fixed-rate mortgage dropped by half a percent, as concerns about a potential recession continue to rise. While the drop provides minor relief to buyers, the housing market will continue to normalize if home price growth materially slows due to the combination of low housing affordability and an expected economic slowdown.”
— Sam Khater, chief economist at Freddie Mac, in a July 7 press release
It’s tempting to fixate on the buzzword: recession. But the potential for an economic slowdown in the coming months, likely as it may be, doesn’t offer much timely insight for today’s buyers. A more pertinent takeaway from Khater’s statement is that housing affordability will continue to constrain homebuyers this summer, at least until the market “normalizes.”
To get a better idea of how drastically mortgage affordability has changed this year so far, consider the statistics:
— Home prices rose 20.2% annually in May, marking the 16th consecutive month of double-digit increases, per the CoreLogic Home Price Index. But relief may be on the way for those who can wait, says CoreLogic’s deputy chief economist Selma Hepp in a statement. She expects “rapid deceleration in the rate of growth over the coming year.”
— Fixed 30-year mortgage rates have surged from 3% to well past 5% between January and May. Higher interest rates, combined with rapid home price acceleration, have caused the average monthly payment on a new mortgage to rise by $513 during that time, according to the Mortgage Bankers Association.
— Alternatively, if you budgeted $1,500 for your monthly principal and interest payment, you could borrow a mortgage worth up to $355,000 when rates were at 3.1% in January. With today’s 5.3% mortgage rate, you can only borrow $270,000 to keep that same monthly payment. That amounts to an $85,000 loss in purchasing power.
Although recent data (mercifully) points to signs of a stabilizing housing market, it’s impossible to know for certain when that will happen. In the meantime, summer homebuyers are left with a choice — find a cheaper house or budget for higher mortgage payments. Those who can’t strike a balance are simply priced out of homeownership, and it’s leaving consumers increasingly frustrated, according to Fannie Mae’s Home Purchase Sentiment Index. Just 20% of respondents believe it’s a good time to buy a home, while 75% think the opposite.
Notably, an increasing segment of current homeowners also believe it’s a bad time to sell, despite the fact that they may stand to make a significant profit due to sustained home price appreciation over the past several years. But the reluctance to sell makes sense when you consider that many homeowners were lucky enough to refinance to a sub-3% mortgage rate. Not even the most gifted oracle can tell you when — or more importantly, if — rates will ever dip that low again.
[Compare: Mortgage and Refinance Rates in Your Area.]
Indicator of the Week: ARMs Are Making a Comeback
Adjustable-rate mortgages were vilified following the housing market crash, when subprime lenders lured unwitting borrowers into home loans they couldn’t sustainably afford, with ultra-low “teaser rates.” But in the wake of the Great Recession, lawmakers passed the Dodd-Frank Act to regulate the financial servicing industry — including enhanced protections for ARM borrowers, according to the Consumer Financial Protection Bureau.
While adjustable rates still carry the inherent risk that monthly payments can rise over time, many of today’s homebuyers are giving ARMs a second chance. The share of ARM loans more than tripled during the first half of 2022, from 3% in January to around 10% currently, MBA data shows. This is still far below pre-2008 levels, when a third of all mortgages were adjustable-rate.
Despite the resurgence of ARMs, overall mortgage activity continues to be restricted by (relatively) higher interest rates and limited housing inventory, according to MBA’s Weekly Applications Survey. Mortgage purchase applications are 17% lower now than they were a year ago. Red-and-white “For Sale” signs, normally a harbinger of summer, aren’t exactly sprouting from well-manicured lawns like weeds.
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