Homebuyers are having a ‘come to Jesus’ moment as mortgage rates now top 7% — here’s when things are expected to get better

The rate on America’s most popular home loan has topped 7% for the first time in 20 years as the housing market faces a potentially lengthy slowdown.

Rapidly rising mortgage rates have taken a toll on home buying, and forecasts show continued weakness into 2023.

Home sales and new listings have hit record lows since the early days of the pandemic, and more than 20% of sellers dropped their asking price in September, according to the Redfin real estate firm.

“People have come to Jesus about the housing market,” Redfin CEO Glenn Kelman said in an interview on CNBC this week.

“So the folks who are still in the market heading into Thanksgiving are anxious to sell, but most people are just withdrawing their listings.”

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30-year fixed-rate mortgages

A 30-year fixed-rate mortgage averaged 7.08% this week, up from 6.94% last week, mortgage finance giant Freddie Mac reported on Thursday.

Last year at this time, the 30-year rate was averaging 3.14%.

With rates above 7%, many home shoppers are settling in for a long wait on the sidelines as higher borrowing costs have totally priced them out of the market.

“Homebuyer affordability took an enormous hit in September,” said Edward Seiler, associate vice president of housing economics for the Mortgage Brokers Association (MBA).

“With mortgage rates continuing to rise, the purchasing power of borrowers is shrinking,” he said. “The median loan amount in September was $305,550 — much lower than the February peak of $340,000.”

Those who are buying face much higher monthly payments. The national median mortgage payment is up by $558 — or 40.4% — since the start of 2022, according to an MBA index that measures how monthly mortgage payments vary, relative to income, across time.

15-year fixed-rate mortgages

The average rate on a 15-year fixed-rate mortgage was 6.36% this week, up from 6.23% last week, Freddie Mac says.

A year ago, the 15-year home loan was averaging 2.37%.

Part of the reason mortgage rates have spiked so much — and so quickly — is the Federal Reserve’s unflinching hikes to its trend-setting interest rate — an effort to slow the economy and bring down sky-high inflation.

While the Fed doesn’t set mortgage rates directly, changes to its federal funds rate ultimately influence what consumers pay to borrow money for a variety of items, including cars and homes.

5-year adjustable-rate mortgage

The typical rate on a five-year adjustable-rate mortgage, or ARM, was 5.96% this week, up from last week when it averaged 5.71%.

Last year at this time, the five-year ARM was averaging 2.56%.

ARMs start out with a period of fixed interest rates — typically between three and 10 years. The rates are typically lower than they are on fixed-rate loans, like the more popular 30-year mortgage.

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

What’s happening with home prices

While home prices are moderating in some areas, they remain relatively high in most markets. Combined with higher borrowing costs, buying a home is no longer possible for many Americans.

“Many potential homebuyers are choosing to wait and see where the housing market will end up, pushing demand and home prices further downward,” said Sam Khater, Freddie Mac’s chief economist.

The Case-Shiller Home Price Index for August marked the fifth straight month of decelerating annual home price appreciation. The index posted a 13% gain, down from 15.6% in July.

According to CoreLogic’s Home Price Index forecast, annual growth will slow to 9% by December and down to less than 1% by the end of March 2023.

High mortgage rates are severely impacting affordability in markets on the West Coast and in the Mountain West, CoreLogic says.

Mortgage applications continue falling

An index measuring mortgage application volume was down another 1.7% last week compared to the week before, according to the MBA’s weekly survey.

Specifically, applications for mortgages to purchase homes were down 2% to the slowest pace since 2015, while refinance applications were essentially flat. Compared to last year, purchase mortgages were down 42% and refis have fallen 86%.

“The ongoing trend of rising mortgage rates continues to depress mortgage application activity, which remained at its slowest pace since 1997,” said Joel Kan, MBA’s vice president and deputy chief economist.

The average rate on a 30-year fixed mortgage is expected to peak in the last quarter of this year and then begin to fall in 2023, according to the latest MBA forecast.

“MBA’s forecast expects both economic and housing market weakness in 2023 to drive a 3% decline in purchase originations, while refinance volume is anticipated to decline by 24%,” Kan said.