Can buyers overcome the psychological barrier of 8% rates?
As mortgage rates continue to hit multi-decade highs, the industry waits to see how much it dries up demand.
Key points:
- 30-year mortgage rates rose for the sixth consecutive week to 7.63%, according to Freddie Mac’s weekly survey. Daily surveys show rates above 8%.
- Strong retail sales and a healthy jobs report raise the possibility of an additional interest rate hike next month.
- Home sales are at the lowest levels since the Great Recession — but unlike that period, prices aren’t dropping significantly.
It was just two months ago that homebuyers were wringing their hands over the return of 7% mortgage interest rates. Now it's looking like they'll have to confront the 8% threshold.
The 30-year fixed-rate mortgage averaged 7.63% this week, according to the latest Freddie Mac survey. It's the sixth consecutive week of increases and marks another multi-decade high. The 15-year fixed-rate mortgage edged closer to 7%, coming in at 6.92% for the week.
Daily surveys suggest that rates are even higher. On Oct. 19, the average 30-year rate was 8.03%, according to Mortgage News Daily. It's the highest level for that survey in 23 years.
The steady rise can be attributed in part to the hotter-than-expected retail sales data and job market report in September, said Jiayi Xu, an economist at Realtor.com.
"While under typical circumstances, such positive data would be a reason for cheer among investors and businesses, it has now raised concerns regarding the inflation outlook and the likelihood of further Federal Reserve interest rate hikes," Xu said.
High rates, along with home prices that still show annual gains, have put the brakes on home sales. The National Association of Realtors reported that existing sales dropped below 4 million for the first time since 2010 in September.
But there's one big difference between the current slowdown and the one that occurred following the Great Recession: home prices.
"At that time, tough economic conditions and slow demand pushed home prices down 30% year over year in some parts of the country, creating an opportunity for first-timers to snatch up starter homes — but this time, there's no deal to be had," said Chen Zhao, who leads Redfin's economic research team.
As potential homebuyers now face 8% mortgage rates, the industry will have to see if that number presents a psychological barrier, causing more buyers to pause their plans, said Ryan Lundquist, a Sacramento-area appraiser.
Calling 8% rates "a gut punch to housing demand," Lundquist said that sellers will need to do more to close the deal, whether that's reducing prices, giving credits to buyers or offering to buy down the rate.
"There is a smaller pool of buyers right now. It is not 2021 where you (the seller) had total control, and buyers are going to need more help to make things work if rates keep ticking up," Lundquist said.
Mortgage applications dropped significantly this week, falling 6.9% compared to the week before and hitting the lowest level since 1995, according to the Mortgage Bankers Association. High mortgage rates are a major culprit, but some of the slowdown is likely seasonal.