Any of you looking to buy a home have probably noticed the explosion of mortgage rates. They remain near the highest levels since 2010.
The 30-year fixed mortgage rate averaged 5.10% in the week ended April 28, down just slightly from the prior week’s 12-year high of 5.11%, according to Freddie Mac. The rate was 2.98% a year ago.
And with the Federal Reserve poised to implement a series of interest-rate increases, following an initial hike in March, mortgage rates are likely to resume their ascent.
“The combination of swift home price growth and the fastest mortgage rate increase in over 40 years is finally affecting purchase demand,” Sam Khater, Freddie Mac’s chief economist, said in a statement.
The Case-Shiller home price index soared 19.8% in the 12 months through February, the third-highest increase in the 35-year history of the data.
“Homebuyers navigating the current environment are coping in a variety of ways, including switching to adjustable-rate mortgages, moving away from expensive coastal cities, and looking to more affordable suburbs,” Khater said.
Migration to Adjustable Rate Mortgages
Homebuyers are migrating to adjustable rate mortgages (ARMs) to “mitigate higher monthly payments,” Mortgage Bankers Association (MBA) economist Joel Kan said in a statement.
ARMs generally start with lower rates than fixed mortgages, and sometimes their rates are fixed for the first five, seven or 10 years of the mortgage. The danger, of course, is that ARM rates can soar later in the mortgage’s term.
In any case, ARMs accounted for 9% of mortgage applications last week in volume terms, double the total of three months ago, according to the MBA. That also coincides with a 1.5 percentage-point increase in the 30-year fixed rate.
Weaker Demand, Smaller Price Gains
As for home prices, Khater expects the decline in overall home demand to “soften … price growth to a more sustainable pace later this year.”
In an illustration of the slide in demand, the National Association of Realtors’ Pending Home Sales Index fell 1.2% in March, the fifth monthly drop in a row. Pending sales, measured for existing homes, slid 8.2% from a year earlier.
A sale is pending when the contract has been signed but the transaction hasn’t closed. The sale is usually finalized within one or two months of signing. So pending sales are a good indicator for actual future sales.
"The falling contract signings are implying that multiple offers will soon dissipate and be replaced by much calmer and normalized market conditions," Lawrence Yun, the NAR's chief economist said in a statement.
"As it stands, the sudden large gains in mortgage rates have reduced the pool of eligible homebuyers, and that has consequently lowered buying activity.”
