Mortgage rates continue to escalate, approaching 6 percent

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Mortgage rates continued their upward trend this week and are showing no signs of slowing as they near 6 percent, according to data released by Freddie Mac on Thursday.

Fixed-rate mortgage rates have risen by more than two full percentage points since the beginning of the year. The higher borrowing costs are part of a Federal Reserve campaign to raise interest rates to cool inflation, and the impact on the housing market was immediate.

In the past month alone, there have been fewer home sales, a drop in first-time buyers and sudden layoffs in the industry, signs that the overheated housing market may be deflating as higher interest rates lower demand for property.

“Real estate is very sensitive to mortgage rate hikes, so the higher interest rates will pull back sales and further slow the housing market,” said Lawrence Yun, chief economist for the National Association of Realtors. “Residential construction is a major contributor to the US economy, and we’ve already seen builders scale back production and slow sales. Let’s hope higher interest rates don’t plunge the US into a recession.”

The slowdown in home construction is having a chilling effect on the home loan industry. JPMorgan Chase is laying off hundreds of employees this week and hiring hundreds more. Industry heavyweight Wells Fargo laid off more than 100 employees at its mortgage lending business after revenue fell in the first quarter. Other lenders such as Pennymac, LoanDepot and Guaranteed Rate have also reduced their workforce.

The rise in interest rates is also shaking real estate companies. Compass Real Estate Brokerage recently announced layoffs of 10 percent of its employees and a hiatus from hiring and expansion. Real estate agent Redfin also laid off 8 percent of its staff.

“The real estate industry is one of the most competitive industries, so any downturn quickly leads to a market shakeout for companies,” Yun said.

The Fed is raising interest rates by the largest amount since 1994 to fight inflation

The 30-year fixed-rate mortgage rose to 5.81 percent from 5.78 percent a week ago, according to Freddie Mac. A year ago it was 3.02 percent. The 15-year fixed-rate mortgage averaged 4.92 percent, up from 4.81 percent the previous week. A year ago it was 2.34 percent. The five-year floating rate averaged 4.41 percent, up from last week when it averaged 4.33 percent. A year ago it was 2.53 percent.

Earlier this month, the Federal Reserve raised interest rates by three-quarters of a percentage point to tame inflation — the sharpest rise since 1994. It was the third of seven rate hikes expected this year. Although the central bank does not set mortgage rates, its own interest rate activity indirectly affects it.

Despite higher mortgage rates, mortgage applications increased for the second straight week in the week ended June 12, according to the Mortgage Bankers Association (MBA).

“However, buying activity was still 10 percent lower than a year ago as inventory levels and higher mortgage rates dampen demand,” said Joel Kan, MBA’s associate vice president of economic and industry forecasts, in a statement.

Kan said the average loan size is just over $420,000, well below the $460,000 peak earlier this year, and may be a sign that home price growth is slowing.

Harrison Beacher said his potential homebuyers with a budget of less than $450,000 had a “visceral reaction” to the added cost of a home loan with a 6 percent mortgage rate.

“The difference of a few hundred dollars when paying at a higher interest rate has a much larger impact on buyers at an entry-level price,” said Beacher, managing partner of the Coalition Properties Group at Keller Williams Capital Properties in DC. “These buyers pulled out of the market and decided to continue renting.”

Since mortgage rates began rising in early 2022 and then jumped more than half a percentage point last week to their highest level since 2008, homebuyers are increasingly feeling the drop in their expected home payments. And yet the housing market has not quite bottomed out. Instead, there is a slowdown in sales and demand.

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“The combination of rising interest rates, inflation and home prices means homebuyers have lost almost 50 percent of the purchasing power they had six months ago,” said David Howell, executive vice president and chief information officer of McEnearney Associates in McLean. Va. “Any other commodity that has undergone such a dramatic change would see its demand collapse, but that hasn’t happened.”

Over the past six weeks, signed contracts in the DC region are down about 15 to 20 percent compared to the same period last year, “but it’s not that big of a drop,” he said.

Howell said that 2021 and 2020 are two of the most unusual real estate markets ever. Today’s housing market is comparable to 2019, except with an even lower inventory of homes for sale and higher mortgage rates, he said.

Still, mortgage rates aren’t expected to fall anytime soon, and there’s no sign that rates will fall, either, Beacher said. Rather than a general price drop, the pace of appreciation is expected to slow, although some individual sellers are cutting their prices today if their home hasn’t sold.

Homebuyers who were at the high end of their budgets at interest rates of 3.5 to 4 percent could face a housing payment that’s above their comfort level, said Carolyn Sappenfield, a real estate agent at Re/Max Realty Services in Bethesda, Maryland.

“If you don’t have to move and the payment is too high, you might want to step back and see what happens with the market,” Sappenfield said.

First-time buyers and those looking for entry-level homes need to be flexible about the location and type of home they buy, Beacher said.

What the Fed’s rate hike means for mortgages

“Your first house isn’t your forever home,” Beacher said. “It’s not impossible to buy, but you might not be able to buy exactly what you want. The dynamic is that renting is no cheaper than buying right now, and your rent is likely to go up as well.”

The DC condo market, particularly older buildings with no outdoor space, is softer than the rest of the housing market, Howell said. That could present an opportunity for some first-time buyers.

For sellers, Beacher recommends pricing their home appropriately and considering offering closing cost loans to help buyers lower their interest rate to make their payment more affordable.

“I train all of my clients to stay in the game if they have the means to buy,” Beacher said.

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