The number of applications for mortgages has plummeted to its lowest level in almost three decades, as high interest rates discourage buyers from purchasing homes and sellers from putting their properties on the market.
According to a press release by the Mortgage Bankers Association (MBA), mortgage applications fell 6 percent in the week ending September 29, reaching the lowest volume in approximately 27 years. The MBA attributes this market trend to the surge in mortgage rates, which have been driven up by the increase in Treasury yields. Joel Kan, MBA’s vice president and deputy chief economist, stated that the 30-year fixed-rate mortgage rate has risen to 7.53 percent, the highest rate since 2000.
This rapid increase in mortgage rates has caused a significant decline in mortgage applications, with activity dropping to its lowest level since 1996. As a result, the home purchase market has slowed down to its lowest activity level since 1995.
Freddie Mac data reveals that the 30-year fixed-rate mortgage rate has more than doubled since January 2020, reaching 7.49 percent as of October 4, 2023. The combination of inflation shifts, job market changes, and uncertainty surrounding the Federal Reserve’s next move has contributed to the highest mortgage rates in a generation, resulting in decreased homebuyer demand.
Experts predict that mortgage rates could reach 8 percent, a level not seen in over 23 years.
“In the short run, it’s possible that mortgage rates may go up to 8 percent,” Lawrence Yun, chief economist at the National Association of Realtors (NAR), said in a press call last month, according to Yahoo Finance.
The 10-year Treasury yield, which mortgage rates typically follow, has been increasing due to the Federal Reserve’s interest rate hikes. Between March 2022 and July 2023, the Fed raised interest rates 11 times, from zero to over 5 percent.
The central bank has indicated that another hike may occur before the end of the year, and interest rates could remain elevated for the next three years. This scenario would pose challenges for homebuyers, as mortgage rates would also remain high.
Constraining Home Supply
High mortgage rates are impacting the demand-supply dynamics in the housing market. Homeowners are hesitant to sell their properties, making it difficult for buyers to find affordable homes within their budgets.
Homeowners are reluctant to sell because they secured a favorable mortgage rate of 3 percent for the remaining term of their 30-year loan during the pandemic. Moving would mean accepting a rate that is twice as high, resulting in a limited pool of available homes and preventing home values from declining.
A ‘For Sale’ sign stands outside a home in Colorado Springs, Colo., on June 22, 2023. (David Zalubowski/AP Photo)
In the first half of 2023, only 1 percent of American homes changed ownership, the lowest percentage in a decade.
According to Redfin, 59 percent of recent U.S. homebuyers find buying a home more stressful than dating.
In a Redfin survey, 41 percent of respondents reported difficulty in dating, while 59 percent found buying a home challenging. Home-buying was even considered more difficult than finding a new job, getting into college, getting a divorce, or potty training a child.
“With mortgage rates at the highest level in more than two decades, many of the people moving today are relocating not because they want to, but because they have to—often due to a major life event like a divorce or a new job.”
In July, NAR emphasized the need for “bold action” to address supply challenges in the housing market. The organization estimated a shortage of 4–6 million housing units across the United States.
Affordability Challenges
According to NAR data, the median price of an existing single-family house has surged from $300,200 in 2020 to $412,300 as of July 2023.
During this period, the mortgage rate has risen from 3.17 to 6.92 percent, and the required income for buyers has more than doubled from $49,680 per year to $104,496.
Mortgage payments as a percentage of income have increased from 14.7 to 28.5 percent, meaning new homebuyers may spend up to a third of their income on mortgage payments.
“Homebuyers face the most difficult affordability conditions in nearly 40 years due to limited inventory and rising mortgage interest rates,” said Jessica Lautz, NAR’s deputy chief economist and vice president of research.
“The impact is exacerbated among first-time buyers who are more likely to be from underrepresented segments of the population.”
According to a NAR survey, the top three reasons why buyers have not yet purchased a home are: insufficient availability of homes within their budgets (34 percent), waiting for mortgage rates to decrease due to affordability concerns (18 percent), and waiting for prices to drop (9 percent).
How are high mortgage rates impacting the housing construction industry?
An planning a wedding or getting divorced, and 30 percent feel that it is the most stressful experience in their lives. With the current high mortgage rates, these numbers are expected to increase, further exacerbating the challenges in the housing market.
The impact of high mortgage rates is not limited to the home purchase market; the refinance market is also experiencing a decline. According to the MBA, refinance applications have dropped by 3 percent in the week ending September 29. Homeowners who would have otherwise taken advantage of lower rates to refinance their mortgages are now deterred by the higher rates, resulting in a decrease in refinancing activity.
Furthermore, the high mortgage rates are also affecting the housing construction industry. With fewer buyers in the market, developers are scaling back on new construction projects. This decline in new housing starts further adds to the limited supply of homes, exacerbating the challenges faced by prospective buyers.
The impact of high mortgage rates is rippling through the entire housing market, affecting buyers, sellers, homeowners, and construction companies alike. If these rates continue to rise, it could have long-term implications on the affordability and accessibility of housing for many Americans.
Government Intervention
In response to the challenges posed by high mortgage rates, some advocates are calling for government intervention to stabilize the housing market. They argue that measures such as incentivizing homebuilders to increase construction, expanding affordable housing programs, and implementing regulatory reforms to reduce construction costs could help alleviate the current housing crisis.
Additionally, there are calls for the Federal Reserve to reconsider its interest rate hikes and adopt a more cautious approach to prevent further damage to the housing market. Critics argue that the current rate hikes are excessive and could do more harm than good, particularly in an already volatile housing market.
Ultimately, the future direction of mortgage rates and the housing market remains uncertain. While some experts predict that rates could continue to rise, others believe that they may stabilize or even decrease in the coming months. The Federal Reserve’s approach to interest rates and the overall state of the economy will play a significant role in determining the trajectory of mortgage rates in the near future.
For now, prospective homebuyers and sellers will have to navigate the challenges posed by high mortgage rates, limited supply, and increased competition. It is crucial for individuals to carefully assess their financial situation and consider the long-term implications before making any decisions regarding homeownership.
Overall, the current state of the housing market, marked by the lowest level of mortgage applications in nearly three decades, calls for attention and action. As mortgage rates reach their highest levels in years, it is imperative for stakeholders, including policymakers, industry professionals, and consumers, to collaborate and find solutions to ensure a stable and sustainable housing market for all.
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