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Homebuyers and sellers have never been this ‘pessimistic’ as mortgage rates creep above 7% — here’s what the experts say about the chances of a crash or rebound

Homebuyers and sellers have never been this ‘pessimistic’ as mortgage rates creep above 7% — here’s what the experts say about the chances of a crash or rebound

Mortgage rates inched over 7% again following last week’s rate hike by the Federal Reserve — and both buyers and sellers are stalling amid economic volatility.

“The housing market is the most interest-rate sensitive segment of the economy, and the impact rates have on homebuyers continues to evolve,” says Sam Khater, chief economist with housing finance giant Freddie Mac.

“Home sales have declined significantly and, as we approach year-end, they are not expected to improve.”

The number of new listings on the market was down 20% from one year ago, according to Realtor.com.

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30-year fixed-rate mortgages

The average interest rate on a 30-year fixed home loan is currently 7.08%, up from 6.95% last week, Freddie Mac reported Thursday.

Last year at this time, the 30-year rate was averaging 2.98%.

However, it’s possible rates have mostly topped out and could drop in the future, says National Association of Realtors (NAR) chief economist Lawrence Yun — noting an unusually large discrepancy between today’s mortgage rates and the federal funds rate.

“A return to a normal spread between the government borrowing rate and the home purchase borrowing rate will bring the 30-year mortgage rates down to around 6%,” explains Yun.

15-year fixed-rate mortgages

A 15-year fixed-rate mortgage is now averaging 6.38%, up from 6.29% last week, according to Freddie Mac. In comparison, the 15-year rate averaged 2.27% last year at this time.

With rates so high, buyers and sellers are remaining in a “wait-and-see” mode, writes Danielle Hale, chief economist at Realtor.com.

The median listing price is up 11.7% from last year; however, the pace of growth is continuing to slow. The typical price of a home for sale on Realtor.com was $425,000 in October, compared to the summer’s peak of $450,000.

“The price of the typical for-sale home continues to climb at double-digit pace, and could finally return to single-digit territory by the end of the year if the recent slowing is sustained,” says Hale.

Moving into 2023, the NAR’s Yun expects home sales nationwide will slide another 7%, while the median price will increase a modest 1%. The market won’t truly rebound until 2024, he believes, predicting a 10% jump in sales and 5% rise in prices.

“For most parts of the country, home prices are holding steady since available inventory is extremely low,” Yun says, tempering expectations of a Great Recession-style crash.

“Housing inventory is about a quarter of what it was in 2008 … Distressed property sales are almost non-existent, at just 2%, and nowhere near the 30% mark seen during the housing crash. Short sales are almost impossible because of the significant price appreciation of the last two years.”

5-year adjustable-rate mortgage

The five-year adjustable-rate mortgage — or five-year ARM — is also up from last week, when it was averaging 6.29%. It’s now at 6.38%.

Last year at this time it was averaging 2.27%.

ARMs start off with lower interest costs than fixed-rate loans, like the more popular 30-year fixed.

However, adjustable rates can surge once the initial fixed-rate period ends, since they’re tied to a variable benchmark like the prime rate.

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Housing confidence is plummeting

Spooked by rising rates and economic uncertainty, both buyers and sellers are pulling back from the housing market.

Fannie Mae’s Home Purchase Sentiment Index dropped 4.1 points in October to a record low of 56.7, marking its eighth consecutive monthly decline.

Only 16% of respondents said that now is a good time to buy a home, while the percentage who believe now is a good time to sell a home continued to decline.

“Consumers are increasingly pessimistic about both homebuying and home-selling conditions,” says Doug Duncan, the mortgage company’s senior vice president and chief economist.

“As continued affordability constraints reduce homebuyer demand, and homeowners become reluctant to sell at potentially reduced prices, we expect home sales to slow even further in the coming months, consistent with our forecast.”

Economists at Goldman Sachs are forecasting home prices will drop by 5-10% next year.

Mortgage applications continue to drop

Increased borrowing costs, high inflation and recession concerns are still keeping would-be homebuyers wary of entering the market.

Mortgage purchase applications decreased by 1% from the previous week, according to the Mortgage Bankers Association (MBA). This was 41% lower than the same time last year.

“Purchase applications increased for the first time after six weeks of declines but remained close to 2015 lows, as homebuyers remained sidelined by higher rates and ongoing economic uncertainty,” says Joel Kan, vice president and deputy chief economist at the MBA.

“Refinances continued to fall, with the index hitting its lowest level since August 2000.”

Applications to refinance existing home loans were down 4% from the previous week, and a drastic 87% from one year prior.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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