Mortgage Market Slows as Homebuyers Take a Pause

Amidst a whirlwind of financial shifts, the American housing market finds itself at a crossroads as mortgage rates soar to heights not seen in decades. With a 7.49% interest rate now the norm, prospective homebuyers are grappling with a financial landscape vastly different from the previous year.

Consider this: Assuming a 7.49% rate, a 30-year fixed mortgage for a $600,000 home results in a staggering monthly payment of $4,191. Just a year ago, that same mortgage would have come with a much more manageable $2,418 monthly payment.

The catalyst for this financial shockwave is the relentless surge in mortgage rates, which has effectively “smothered” the housing market. On October 5th, according to Freddie Mac’s weekly lender survey, the average 30-year fixed rate reached the daunting 7.49% mark, marking a level not witnessed since December 2000.

Adding to the upheaval, the Bureau of Labor Statistics unveiled a remarkable September employment report, showcasing the addition of 336,000 jobs—69,000 more than the 12-month moving average. This surge in employment suggests that a one-half-point increase in the Federal Reserve’s prime rate may be on the horizon, with the potential for the prime rate to reach 9% before the close of 2023. Such projections cast a shadow over the mortgage landscape, with expectations that 30-year fixed mortgage rates could surpass 8%.

Comparing these recent figures to the historic low Freddie rate of 2.65% in January 2021, when the monthly payment for a $600,000 mortgage stood at $2,418, highlights the dramatic shift in affordability.

For well-qualified borrowers, the cost of mortgage borrowing has risen by a staggering 73% in just over two and a half years. This rapid ascent in mortgage rates has led to a significant decline in mortgage applications, plunging to the lowest levels since 1996. Joel Kan, Vice President and Deputy Chief Economist at the Mortgage Bankers Association, notes that the purchase market has slowed to levels last witnessed in 1995, driven by the rapid rate hikes that have priced out a growing number of potential homebuyers.

Industry experts are also weighing in on the crisis. Al Hensling, President of United American Mortgage, emphasizes the impact on home affordability: “The interest rate climb has directly affected the borrowing power of buyers, pricing many of them out of the market or forcing them to consider less expensive properties.” This challenge is particularly pronounced in areas like Southern California, where the already limited housing supply is further strained by homeowners reluctant to give up their sub-4% mortgages.

For those who can’t qualify for conventional mortgages offered by Freddie or Fannie Mae, the non-prime or non-qualified mortgage sector provides some hope. Dean Ayres, Senior Vice President at Foundation Mortgage, points out that it’s not just about the rate but whether the deal can be secured. Foundation Mortgage specializes in non-qualified mortgages and works diligently to understand the reasons behind loan denials.

Additionally, there’s a surprising twist with wholesale mortgage rates, those sourced by mortgage brokers. These rates are rapidly surging, making it prohibitively expensive to offer zero-point loans, even for well-qualified borrowers. For those on the margin of qualification, the challenge becomes nearly insurmountable, with exotic mortgage rates soaring to above 10%.

As these tumultuous financial trends continue, the near-term outlook for homebuyers remains bleak. Higher rates are likely to dampen price growth, potentially leading to a challenging economic period in the coming year. For prospective buyers, opportunities may arise from distressed home sellers, but the road ahead is fraught with uncertainty.