High mortgage rates cool off housing market


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Tahreem Ashraf

Mortgage rates are reportedly higher as the Federal Reserve aims to keep inflation under control, but with investors having mixed speculations about possible recession, the economy may remain stable for a while.

The 30-year fixed mortgage rate averaged to 5.56% on Aug. 29, an increase of 12 basis points from a week before, Zillow claims. The rates have been above 5% since April, in contrast to being as low as 2.65% last year.

The average percentage rate for the 15-year fixed rate rose to 4.86%, while the average rate on a five-year adjustable-rate mortgage rose to 5.19%.

Rising from the historic lows of the pandemic, the rates jumped close to 6% in mid-June and have been volatile since due to growing concerns about the economy.

The increased mortgage rates are a sign of an expanding economy, but the latest economic reports were not encouraging enough to push it upward. As a result, the housing market is cooling off.

“Home sales continue to decline, prices are moderating, and consumer confidence is low,” Sam Khater, Freddie Mac’s chief economist, told CNN.

New home sales fell by 12.6% in July, a 29.6% decrease from a year ago, according to data from the U.S. Census Bureau and the Department of Housing and Urban Development.

Mortgage applications reportedly dropped 1% last week. In turn, buyers are now more inclined toward loans that offer lower down payments.

“Last week’s purchase results varied, with conventional applications declining 2% and government applications increasing 4%, which is potentially a sign of more first-time homebuyer activity,” Joel Kan, an economist for the Mortgage Banking Association, told CNBC.

Moreover, the Fed’s campaign to increase short-term interest rates to curb inflation also discouraged many would-be buyers.

Fed Chair Jerome Powell repeatedly said the central bank’s primary focus is to decelerate inflation. One strategy is to target mortgage rates and increase short-term interest rates, but the inflation is still above the Fed’s target, which warrants further hikes in the coming months.

“The Fed’s continued rate hikes, combined with balance sheet reduction through mortgage-backed securities roll offs are expected to keep upward pressure on mortgage rates,” George Ratiu, economic research manager of Realtor.com, told CNN. He added that the push for balance in real estate markets is “losing steam.”

The housing market is sensitive to interest rates, and the higher rates discourage potential investors. For many buyers, the American dream of owning a home has become less attainable.

“Nowhere is this more evident than in housing affordability measures, with the prospective monthly payment on a typical new mortgage climbing dramatically,” Doug Duncan, Fannie Mae senior vice president and chief economist, said in a press release. “As a result, both new and existing home sales continue to slow, while refinance activity has fallen substantially, with what’s left largely consisting of equity extraction.”