Mortgage Rates Rise Beyond 7% Barrier

Mortgage rates surged above the 7% threshold for the 30-year fixed mortgage term this week, according to Freddie Mac. This is the first time that average rates have entered 7% territory since early 2002. Interest rates also rose for the 15-year fixed term and the 5/1 adjustable-rate mortgage. Here are the current mortgage interest rates, as of Oct. 27:

30-year fixed: 7.08% with 0.8 point (up from 6.94% a week ago, up from 3.14% a year ago).

15-year fixed: 6.36% with 1.4 points (up from 6.23% a week ago, up from 2.37% a year ago).

5/1-year adjustable: 5.96% with 0.3 point (up from 5.71% a week ago, up from 2.56% a year ago).

[Read: Best Mortgage Lenders.]

“The 30-year fixed-rate mortgage broke 7% for the first time since April 2002, leading to greater stagnation in the housing market. As inflation endures, consumers are seeing higher costs at every turn, causing further declines in consumer confidence this month. In fact, many potential homebuyers are choosing to wait and see where the housing market will end up, pushing demand and home prices further downward.”

— Sam Khater, Freddie Mac’s chief economist, in an Oct. 27 statement

As mentioned in last week’s column, 7% mortgage rates may become the “new normal” while the Federal Reserve struggles to tame historically high levels of inflation. Higher interest rates have had a tangible impact on homebuilder confidence as well as consumer sentiment, and it’s understandable that many of us are suffering from data overload.

Amid such turbulence in the housing market, even the most seasoned analysts are left grappling for an explanation. So in a recent Q&A, economists at the real estate brokerage company Redfin set out to clear up the confusion in the housing market. Below is some of the most pertinent advice they gave to prospective homebuyers and sellers.

Indicator of the Week: Words of Wisdom From Housing Economists

Why Home Prices Haven’t Fallen, and When They Might Drop

Although higher mortgage rates have long been expected to trigger home price deceleration, home prices have remained stubbornly high in recent months. There are two reasons for this, according to Taylor Marr, Redfin’s deputy chief economist.

“One is that supply has fallen in tandem with demand, and the other is that home-sale price data lags a few months behind what’s happening in the market in real time,” Marr says.

As homebuyer demand has dropped, so has the inventory of homes for sale. That’s because many homeowners who are sitting on favorable 3% mortgage rates are unlikely to sell their homes and trade in for the 7% interest rates offered today. But home prices are expected to fall, eventually — it’s just a matter of waiting for housing data to catch up with the current market conditions.

“In the next six to 12 months, prices are likely to fall year over year, possibly by double digits in some areas,” Marr adds. “They’ll still be higher than pre-pandemic levels, but a lot of homeowners will be unhappy that the value of their home has gone down.”

Who Should Consider Buying a Home in the Current Market?

Generally, it still makes more sense to buy if you plan on living in the same house long term, even amid turbulent market conditions in the near term. Real estate has its ups and downs like any other asset class, but home values tend to appreciate over the course of 10 or more years, Marr says.

“If someone is going to stay in a home for 10 years, it’s unlikely the home will lose value,” Marr says. “Seven percent mortgage rates are a tough pill for a lot of people to swallow. But there is a silver lining to high rates: Competition is low, and buyers have the opportunity to negotiate with sellers.”

Redfin Chief Economist Daryl Fairweather adds that cash buyers could still consider buying right now, since the volatility in mortgage rates won’t impact their monthly payments. These homebuyers are able to take advantage of the slowdown in purchase activity and may be able to negotiate with sellers on the home price, closing costs or other contingencies.

But for the vast majority of buyers who need to finance their home with a mortgage, Fairweather’s advice is to consider markets where prices aren’t as susceptible to national trends.

“There’s a low chance of home values declining significantly in a place like Chicago or upstate New York, so buying in those places is less risky right now,” Fairweather says. “Home values are likely to decline most in pandemic boomtowns like Phoenix, Boise and Austin; prospective buyers in those areas should be more cautious about entering the market right now.”

Advice for Those Who Choose an Adjustable-Rate Mortgage

Rising fixed interest rates have led many buyers to consider an adjustable-rate mortgage instead. Data from the Mortgage Bankers Association shows that about 13% of mortgage applicants are choosing ARMs, which is the highest ARM demand has been since 2008. While this might call back sour memories for those who remember ARM borrowing during the Great Recession, economists say that this mortgage product looks much different today.

“Think about your long-term plans. If you’re planning to stay in a home for five years or less, ARMs are a good option,” Marr says. “‘Adjustable’ is in the name, but it is fixed for a handful of years. But if you’re buying a forever home, ARMs are riskier because the rate — and your monthly payment — could go up in five years.”

ARMs may also be an option for those who are planning to refinance their mortgage before the fixed-rate period expires, Fairweather adds. “Historically, most people who purchase a home have been able to refinance for a lower rate within five years, given the decades-long downward trend in interest rates.”

But Marr reminds prospective ARM borrowers of an important caveat: “Refinancing is expensive. It typically costs 2% to 5% of the value of your loan, which can equal tens of thousands of dollars.”

Before you settle on an adjustable rate over a fixed rate, go over your options with your lender and determine whether refinancing will be worth the interest savings in the long term.

[Read: Best Adjustable-Rate Mortgage Lenders.]

What Today’s Prospective Homebuyers (and Sellers) Should Know

Many buyers who are spooked by today’s high mortgage rates — and the uncertain implications that rates have on future home values — are choosing to hold off on buying a home. That’s not possible for all buyers, though. Some Americans are forced to move due to job changes, divorce or other life circumstances.

“For people who are buying a home right now, make sure you don’t stretch your budget,” says Fairweather. “Mortgage rates are high and inflation is causing prices of most other things to rise, too. Ensure you have a pad of savings to cover emergencies and that every dollar isn’t going to your down payment and monthly mortgage payments.”

Home sellers should also consider the limitations that higher mortgage rates are having on buyers’ budgets. There may be ways for sellers to help buyers reach an affordable housing payment without having to dramatically cut the home price.

“If you need to sell now, be open to negotiations, communicate with the buyer’s agent and work with the buyer to get to their ideal monthly mortgage payment,” Marr says. “There may be concessions that will make the home you’re selling — and the price you want — attractive to both parties. For example, sellers can consider paying for closing costs and/or helping the buyer buy down the mortgage rate.”

Plus, Marr adds that demand could come back sooner than expected if buyers “get used to higher rates.” If rates drop down into 5% territory within the next several months, that could motivate some buyers to break back into the market. For sellers who are ready to cash out, it may pay off to wait a bit longer before listing their home.

More from U.S. News

Mortgage Rates Creep Closer to 7%, Spooking Homebuilders

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Mortgage Rates Average an Ominous 6.66% to Kick Off October

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