Mortgage rates dropped half a percentage point in two weeks

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Mortgage rates fell for the second straight week, but failed to bolster weakened homebuyer demand.

The rate on the 30-year fixed mortgage pulled back to 5.30% this week, down from 5.70% the week prior, according to Freddie Mac. While rates dropped by half a percentage point within two weeks – they remain nearly two percentage points higher than at the start of the year.

Rising borrowing costs have depressed purchase activity as price-stricken buyers face challenging affordability conditions, inflation, and record low inventory levels. Meanwhile, homeowners are hunkering down reluctant to sell or refinance – which would entail giving up their ultra-low rates.

“Over the last two weeks, the 30-year fixed-rate mortgage dropped by half a percent, as concerns about a potential recession continue to rise,” Sam Khater, Freddie Mac’s chief economist, said in a press statement. “While the drop provides minor relief to buyers, the housing market will continue to normalize if home price growth materially slows due to the combination of low housing affordability and an expected economic downturn.”

Homes are seen for sale in the northwest area of Portland, Oregon March 20, 2014. Would-be buyers risk being crowded out by the run-up in home prices and mortgage rates over the past year. Home values nationwide were up 12 percent in January from the same month last year, according to data firm CoreLogic, while mortgage rates have jumped about a full percentage point.   REUTERS/Steve Dipaola  (UNITED STATES - Tags: REAL ESTATE BUSINESS)
Homes are seen for sale in the northwest area of Portland, Oregon. REUTERS/Steve Dipaola (UNITED STATES – Tags: REAL ESTATE BUSINESS)

The slowdown in rates occurred as the U.S. Treasury yield – which mortgage rates closely track – dropped below 3% for the first time since early June. The financial markets shifted toward the safety of bonds as concerns brewed this week over an economic slowdown, while fears of a potential recession grew stronger.

However, this downturn in mortgage rates may be short-lived as the Federal Reserve plans to increase the benchmark interest rate by some 1.75 percentage points over the rest of the year to tame runaway inflation – currently at 40-year highs.

Although some industry experts argue that mortgage rates have priced in most of the Fed’s rate hikes, housing activity has notably cooled in recent weeks.

“The market is always going to ebb and flow and there’s always going to be housing prices and interest rates that move regardless of whether you buy a house or don’t buy a house,” Scott Sheldon, branch manager at New American Funding, told Yahoo Money. “I’ve never with the exception of 2008, have seen anybody buy a house and go financially backwards who have held the house for five years or longer.”

Still, the recent rate volatility has cratered homebuyer confidence.

The Fannie Mae Home Purchase Sentiment index fell to 64.8 in June, its second-lowest reading in a decade. At least 81% of consumers surveyed believe the economy is on the “wrong track,” and a majority of respondents said it would be difficult to get a mortgage as sky-high home prices eat away at their budgets.

The signs of a cooling housing market are already evident.

The volume of mortgage applications decreased for the second week in a row, down 5.4% on a seasonally adjusted basis from one week ago, according to the Mortgage Bankers Association survey for the week ending July 1. The purchase index increased slightly by 7% compared to a week ago, but was 17% lower than the same week a year ago.

“Demand is lower but it’s still relatively strong,” Nadia Evangelou, senior economist and director of forecasting at the National Association of Realtors, told Yahoo Money. “Home prices continue to rise due to low inventory. Although inventory should increase [in the next few months], the transition of renters into homeownership is even more challenging because of weakened affordability.”

While inventory levels increased nearly 29% from a year ago, Evangelou noted that not all first-time homebuyers can afford these new listings.

“We want to help the middle income buyer to be able to afford to purchase a home, however we’re not there yet,” Evangelou said. “It’s great news to see more homes available in the market, but more entry level homes are needed.”

Data from Realtor.com showed the June national median listing price was $450,000, up 16.9% compared to last year and up 31.4% from June 2020. Just last week, when rates were 5.70%, homebuyers were looking at a monthly payment of about $2,100 – before adding taxes or insurance fees – that was more than $790 higher than June 2021.

At today’s rate of 5.30%, the payment on a median priced home would be $1,999, so about $690 higher than last year.

However, there’s one silver lining for first-time buyers. As more homes hit the market, some sellers may be forced to compete on prices. According to Realtor.com, 14.9% of listings across the U.S. lowered prices in the last month, the largest amount since the pandemic began.

A house on sale is seen in Washington D.C., the United States on Dec. 12, 2021. U.S. annual home price growth remained strong at 18 percent in October, the highest recorded in the 45-year history of the index, according to CoreLogic's Home Price Index. (Photo by Ting Shen/Xinhua via Getty Images)
A house on sale is seen in Washington D.C., the United States on Dec. 12, 2021. U.S. annual home price growth remained strong at 18 percent in October, the highest recorded in the 45-year history of the index, according to CoreLogic’s Home Price Index. (Photo by Ting Shen/Xinhua via Getty Images)

“Though the cost of financing a home remains high relative to recent years,” Realtor.com senior economic research analyst, Joel Berner said in a press statement, “buyers will have more chances to find homes in their price range as the undersupplied and overheated housing market starts to cool.”

Homeowners, too, have been hit hard by growing borrowing costs.

For most homeowners, rising mortgage rates have narrowed the opportunities to refinance at a lower rate from slim to none. According to the MBA, the refinance activity is down 78% from a year ago.

“Those that refinanced last year, may not want to sell [or refi] now because they’re not going to find the same loan terms they once did,” Evangelou said.

For some, it’s even paused any plans to tap into their built equity – which has grown to record highs within the past two years. As rates surged in recent weeks, the cost of accessing that equity has also increased.

“They don’t want to give up their 3.2% or 2.8% 30-year rate on their first mortgage,” Scott Sheldon, branch manager at New American Funding, told Yahoo Money. “I don’t blame them, I don’t know if I would want to give that up either.”