The 30-year fixed-rate mortgage averaged 4.99% in the week ending August 4, down from 5.3% the week before, according to Freddie Mac. But that’s still significantly higher than this time last year when it was 2.77%.
Rates rose sharply at the beginning of the year, peaking at 5.81% in mid-June. But since then, economic concerns have made them more volatile.
“Mortgage rates remained volatile due to the tug-of-war between inflationary pressures and a clear slowdown in economic growth,” said Sam Khater, chief economist at Freddie Mac.
The ups and downs are expected to continue, he said.
“The heightened uncertainty surrounding inflation and other factors will likely keep rates variable, especially as the Federal Reserve tries to navigate the current economic environment.”
“Without a clear direction, markets are capping mortgage rates to move within a narrower range as the strong bullish momentum has moderated,” he said.
In response to high inflation, the Federal Reserve raised its benchmark interest rate by 75 basis points last week, the second such hike in as many months.
The Federal Reserve does not directly set the interest rates borrowers pay on mortgages. Instead, mortgage rates tend to track 10-year US Treasuries. But they are indirectly affected by the Fed’s efforts to control inflation.
As for consumers, he said, they continue to spend, racking up a record $16.2 trillion in household debt according to data released by the Federal Reserve this week.
“The big question for consumers is whether businesses will overreact to recession concerns and start cutting payrolls,” Ratiu said. “A sharp pullback in hiring could have a direct impact on people’s ability to continue spending, especially with today’s high inflation.”
Affordability remains the biggest challenge
Buyers are finding homes even less affordable as inflation eats up a large chunk of their income and rising borrowing costs have eroded their purchasing power.
A year ago, a buyer who put a 20% down payment on a $390,000 home and financed the rest with a 30-year fixed-rate mortgage at an average interest rate of 2.77% had a monthly mortgage payment $1,277, according to Freddie’s figures. Mac.
Today, a homeowner buying the same price home with an average rate of 4.99% would pay $1,673 a month in principal and interest. That’s almost $400 more each month.
With rising borrowing costs setting an affordability ceiling for many buyers, home sales are falling, Ratiu said. At the same time, the inventory is improving.
“This brought a welcome sign in this year’s real estate markets: price cuts,” Ratiu said.
However, with buyers defecting, some sellers are also holding back, feeling they have missed the peak of the market, according to Realtor.com. Homeowners with equity may not be forced to sell in this slower market with higher financing costs.
“As the number of new listings dwindles, there is concern that the nascent improvement in inventory may prove elusive as we head into the latter stages of summer,” Ratiu said.