Rapidly increasing mortgage interest rates are making it difficult for first-time home buyers to find good deals and for homeowners to upsize in the current market, a local expert says.
At the start of 2022, the 30-year fixed-rate mortgage average in the U.S. hovered around 3 percent, according to Freddie Mac. By May 19, the average rate had jumped more than 2 percentage points to 5.25 percent.
A Yahoo Finance report said the Mortgage Bankers Association’s weekly market composite index tracking mortgage loan application volume sank 6.5 per cent during the period ending June 3. This represented a fourth consecutive weekly decline and extended a 2.3 per cent drop from the prior week.
Refinance applications fell six per cent week-on-week and were down 75% compared to the same time last year. Meanwhile, purchases fell seven per cent from the prior week, and on a seasonally unadjusted basis, were lower by 21 per cent compared to last year.
“Weakness in both purchase and refinance applications pushed the market index down to its lowest level in 22 years,” Joel Kan, MBA’s associate vice president of economic and industry forecasting, said in a press statement.
“While rates were still lower than they were four weeks ago, they remained high enough to still suppress refinance activity. Only government refinances saw a slight increase last week.”
Many analysts and everyday consumers are wondering whether they should brace for another 2007/08-type financial crisis. With the recent reduction in real economic activity and rise in mortgage rates, it’s easy to see why there’s fear in the air.
It’s forecasted that 30-year mortgage rates could hit 6.2% by the first quarter of next year, which could soften purchases significantly considering price elasticity. Moreover, the U.S. household financial obligations rate has reached 14%, providing less scope for consumers to take on debt financing for home purchases.
Furthermore, there are a few key indicators that provide cause for concern. For example, the National Association of Realtors claim that pending home sales prices decreased by 3.9% in April to the lowest level in two years.
This is interesting, as pending sales provide a leading indicator of the housing market’s health. Additionally, other leading indicators such as building permits (down by 3% in April) and new home sales (down by 20%) are also in poor shape.
Last week, the RBA hiked interest rates for the second time in two months, lifting the cash rate from 0.35 per cent to 0.85 per cent.
In May, the central bank raised the official interest rates by a quarter of a percentage point for the first time in more than a decade to curb surging inflation, with the cost of living up 5.1 per cent over the past year.
Most lenders have passed the full value of the May rate hike to variable mortgage rates, while about two dozen banks are passing on the June hike in full.
According to Nerd Wallet, as of June 2, 2022, the average mortgage rate on a 30-year fixed mortgage is 5.236%. For a 15-year fixed-rate mortgage, the rate is 4.437%. and for a 5-year adjustable-rate mortgage (ARM), the rate is 4.184%.
Millennials have not yet experienced inflation at these levels. And for many of younger millennials, mortgage rates above 5% are higher than they remember in their lifetime. But from a historical perspective, mortgage rates are only now approaching the 50-year average (records weren’t kept by Freddie Mac until around 1971).
In fact, in 1981, the average rate on a 30-year fixed-rate mortgage was over 16.6%. And keep in mind, that this is a rate that was available for borrowers with impeccable credit and a sizable down payment.
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