Mortgage rates just dipped, and home prices may be ‘reaching the peak’ — but buyers hoping for a free-fall ‘will be disappointed’

After climbing above 7% for the first time in 20 years, U.S. mortgage rates moved back down this week even as the housing market continues to reel from high borrowing costs.

Rates also dipped despite the Federal Reserve announcing another hike of three-quarters of a point to its trend-setting federal funds rate — a sign that inflation is still refusing to be tamed.

“It seems that (mortgage) rates have already priced in some of the effects of the Fed’s higher interest rates,” says Nadia Evangelou, senior economist for the National Association of Realtors.

Yet, depending on how quickly — or slowly — consumer prices and the still-frothy job market begin to moderate, rates for home loans could soon start ticking up again.

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30-year fixed-rate mortgages

The interest rate on a 30-year fixed mortgage — America’s most popular home loan — averaged 6.95% this week, down from 7.08% one week earlier, housing finance giant Freddie Mac reported Thursday.

Last year at this time, the 30-year rate was averaging 3.09%.

At today’s rate (and today’s prices), the monthly mortgage payment on a median-priced home is $965 higher than it was one year ago, says George Ratiu, senior economist for Realtor.com.

“The dramatic jump in financing costs has effectively shrunk most buyers’ budgets,” Ratiu says.

15-year fixed-rate mortgages

The rate on a 15-year fixed mortgage averaged 6.29% this week, down from 6.36% last week and 2.35% one year ago, Freddie Mac says.

Sales are still falling, and prices in many markets are following suit.

Average home prices are declining in more than a third of the 100 largest U.S. housing markets, according to research from Florida Atlantic University (FAU) and Florida International University.

The markets with the highest drops are primarily in places that had been experiencing the strongest appreciation: San Jose, Calif., Austin, Tx., San Francisco, Boise, Id. and Salt Lake City.

“Housing markets across the country are definitely slowing down and appear to be reaching the peaks of their current housing cycles,” says Ken H. Johnson, an economist in FAU’s College of Business.

5-year adjustable-rate mortgage

The average rate on a five-year adjustable rate mortgage — or ARM — was 5.96% this week, down just a touch from 5.96% last week.

Last year at this time, the five-year ARM was averaging 2.54%.

ARMs start out with fixed interest rates that typically last between three and 10 years. The rates are usually lower than what they are on a mortgage that’s fixed for a longer term, like the 15- or 30-year.

But after the initial term, the rate on an ARM will adjust up or down based on a benchmark like the prime rate.

The Fed’s impact on mortgage rates

The Federal Reserve does not set mortgage rates, but its federal funds rate influences a range of borrowing costs, including those on home loans.

The Fed’s recent interest rate hikes have affected demand across a variety of sectors, but perhaps none more so than housing.

“The housing market was very overheated for the couple of years after the pandemic as demand increased and rates were low,” Fed Chair Jerome Powell expressed in a press conference this week. “The housing market needs to get back into a balance between supply and demand.”

Powell said that from a financial stability standpoint, however, the market appears to be in better shape now than at the time leading up to the global financial crisis, when lending standards were much looser than they are today.

“It’s a very different situation and doesn’t appear to present financial stability issues,” he said.

Where will rates go from here?

Mortgage rates could climb to 8% or more by the end of this year or early into next should inflation prove stubborn, says Lisa Sturtevant, chief economist at Bright MLS.

The newest data on consumer prices will be released next week — and that could be telling as to the Fed’s actions going forward.

“While rates could be volatile over the coming weeks, homebuyers expecting mortgage rates to fall significantly will be disappointed,” Sturtevant says.

If inflation eases and the Fed relaxes its aggressive hikes, mortgage rates could stabilize around 7%, she says.

The latest forecast from the Mortgage Bankers Association (MBA) shows average 30-year fixed rates peaking in the final quarter of this year and then falling in 2023.

Mortgage applications fall for sixth straight week

The decline in mortgage activity continued last week, falling 0.5% compared to the previous week, according to the latest MBA survey.

Specifically, applications for mortgages to purchase homes fell 1% from the previous week and were down 41% from last year. Applications to refinance existing home loans were down 0.2% and a stark 85% from one year ago.

“Apart from the ARM loan rate, rates for all other loan types were more than three percentage points higher than they were a year ago,” says Joel Kan, MBA’s vice president and deputy chief economist.

“These elevated rates continue to put pressure on both purchase and refinance activity and have added to the ongoing affordability challenges impacting the broader housing market, as seen in the deteriorating trends in housing starts and home sales.”