The spike in rates sidelines potential buyers, while those seeking to refinance rush to finalize transactions.
Homebuyers are reeling from a sudden spike in mortgage rates, with prospects darkening by the day.
The average rate on a 30-year mortgage shot up to 7.37% on Thursday, a significant leap from 7.11% earlier in the week, as reported by Mortgage News Daily. This quarter-point jump comes as jittery investors react to unexpectedly high inflation figures.
Simultaneously, another metric tracking weekly average rates climbed to 6.88%, up from 6.82% the previous week, according to Freddie Mac.
The heightened rates have left potential buyers in a bind, prompting both repeat and first-time buyers to halt their purchase plans. For many, any fluctuation in rates equates to a significant loss in purchasing power.
With inflation persistently high, the situation looks dire for mortgage borrowers, lament housing industry experts.
“March’s inflation statistics were dismal, spelling bad news for interest rates,” remarked Lawrence Yun, chief economist at the National Association of Realtors.
Mortgage Refinances on the Rise
As rates breached the 7% mark, there was an unexpected surge in applications for mortgage refinancing.
The volume of applications to refinance a home loan soared by 10% for the week ending April 5 and was 4% higher compared to the same period last year. The spike was particularly driven by Veterans Affairs (VA) refinance applicants, according to the Mortgage Bankers Association (MBA).
One reason for the rush to refinance could be the looming threat of rising rates. In January, refinance demand surged by 30% compared to a year ago when rates averaged 6.62%, as per Freddie Mac.
With rates hovering in the high-6% range once again, homeowners are displaying heightened sensitivity to even minor shifts. Government loan applicants led the surge in refinancing, hoping to secure a lower rate.
These homeowners likely comprise those who purchased when rates peaked last year or missed out on refinancing during the initial wave spurred by the pandemic.
Nationwide, nearly 80% of US homeowners with a mortgage have a rate under 5% as of January, according to Redfin. Nearly 60% boast rates below 4%, and approximately 22% enjoy rates under 3%. These figures starkly contrast with the current average rate of 6.88%.
The general guideline for refinancing is achieving a reduction of at least 2% in interest rates. However, in today’s market, many homeowners are content with a 1% decrease.
Buyer Pessimism Deepens as Rates Climb
While homeowners rush to refinance, the scenario looks bleak for prospective buyers.
Demand for purchase applications plummeted by 5% for the week ending April 5, as per the MBA’s findings, marking a 23% decline from last year. Buyers have become increasingly sensitive to rates since they started rising from historic lows last year, a trend likely to persist.
“Mortgage rates have remained in the 6.6% to 7% range since the start of the year and are expected to continue until inflation exhibits convincing progress toward the Fed’s 2% target,” noted Hannah Jones, senior economic research analyst at Realtor.com.
March’s inflation rate stood at 3.5%, surpassing expectations and falling far short of the Fed’s goal. Consequently, the Federal Reserve is widely anticipated to postpone planned rate cuts, maintaining rates at elevated levels.
This development has soured housing sentiment.
In March, 34% of consumers surveyed believe that mortgage rates will rise over the next 12 months, up from 32% the previous month, according to Fannie Mae’s homebuyer confidence index. Only 29% anticipate a decline in rates over the same period.
However, rates are just one piece of the puzzle. Buyers also face stubbornly high home prices and limited inventory, factors expected to intensify competition in the upcoming spring season.
This has further dampened buyer optimism. Only 21% of respondents in the Fannie Mae survey deemed it a good time to buy a home.
Nevertheless, there may be a glimmer of hope on the horizon with the potential influx of more inventory into the market.
“With the historically low rates of the pandemic era now firmly behind us, some households seem to be overcoming last year’s sharp rate hike, a transition that could help thaw the housing market further,” remarked Doug Duncan, Fannie Mae’s senior vice president and chief economist.
Fannie Mae now predicts rates to close the year at 6.4%, up from the 5.9% forecasted just a month ago. Sellers also appear to be adjusting to the “new normal” of higher rates and may be more willing to list their properties.
An independent analysis of the housing market confirms this trend. According to Realtor.com, the number of homes actively for sale surged by 23.5% in March, marking the fifth consecutive month of growth. The first quarter of the year also witnessed the highest share of homes actively for sale since 2020, the report revealed.
