To all Americans hoping to be able to buy a home some time soon, or at least afford to do so once in their lifetimes, we have bad news.
On Wednesday, the Mortgage Bankers Association reported that US mortgage rates rose to the highest level since late 2000 last week, sending a key measure of demand down to the lowest in nearly three decades. The contract rate on a 30-year fixed mortgage increased 15 basis points to 7.31% in the week ended Aug. 18.
Separately, the MBA reported that its index of home-purchase applications fell for a sixth straight week to the lowest level since 1995, which dragged the overall measure of mortgage applications down further.
“Applications for home purchase mortgages dropped to their lowest level since April 1995, as homebuyers withdrew from the market due to the elevated rate environment and the erosion of purchasing power,” said Joel Kan, MBA’s vice president and deputy chief economist. “Low housing supply is also keeping home prices high in many markets, adding to the affordability hurdles buyers are facing.”
The MBA’s overall gauge of mortgage applications, which also includes refinancing, fell to 184.8, near the lowest level since 1996.
The reason for the collapse is simple: with housing affordability at or near the lowest on record, the average monthly mortgage payment – based on a median home price and average 30Y fixed-rate mortgage, assuming a 20% down payment – has exploded to a record $2,322m more than double from pre-covid levels.
And it’s about to get even worse: according to Mortgage News Daily, borrowing costs have continued to rise so far this week and on Tuesday the 30-year fixed rate hit almost 7.5%.
Mortgage rates are benchmarked to US Treasuries, and yields on those securities have been climbing as traders increasingly see a resilient economy keeping interest rates higher for longer. Fed Chair Jerome Powell is set to speak at the central bank’s annual Jackson Hole symposium later this week, and minutes from policymakers’ gathering last month showed most officials still saw significant upside risks to inflation, which could require further rate hikes.
As Bloomberg notes, that’ll keep mortgage rates elevated and, along with still-high home prices, put further strain on a residential housing market that had been showing promise earlier in recent months.
The latest housing data further illustrate the trend — homeowners are reluctant to move and take on a higher mortgage rate, so prospective buyers are seeking out new construction instead. As shown int he chart below, the average effective mortgage rate (on outstanding mortgages) is 3.6%, half of the actualy 30Y mortgage, which means tens of millions of homeowners are trapped and unwilling to sell as they would have to refi into a sharply higher rate.