Mortgage rates jumped again this week, giving no relief to price-weary homebuyers still in the market.
The 20-year fixed mortgage rate rose to 5.66% from 5.55% the previous week, according to Freddie Mac, and is up more than half a point from two weeks ago. Although lower than the 5.81% recorded in June, the rate is still more than 2 percentage points higher than at the start of the year.
Higher borrowing costs have left cash-strapped homebuyers in dire straits. Some people have chosen to postpone their purchase plans and wait for better market conditions, while those who remain are taking advantage of the reduced competition to strike a good deal with sellers.
“The increase in mortgage rates comes at a particularly vulnerable time for the housing market as sellers recalibrate prices due to weaker demand, which will likely lead to a continued deceleration in price growth,” he said. Freddie Mac Chief Economist Sam Khater in a press release.
Buyers haven’t been this nervous in the housing market since the early 2000s.
Demand for mortgages hit multi-decade lows in August, according to the Mortgage Bankers Association survey for the week ending August 26, as refinancing and buying activity continued to contract. Shopping activity has declined in eight of the past nine weeks, down 23% from the same week a year earlier.
Although higher borrowing costs are behind the lull in activity, rising inventories and slowing growth in home prices could bring some buyers back into the market.
Signs of the return of first-time buyers are emerging. Applications for government mortgages — such as the Federal Housing Administration, Department of Veterans Affairs and Department of Agriculture, all popular choices among first-time buyers — have seen an uptick in recent weeks, the MBA reported.
“There is definitely more activity in government lending this year compared to last year or the year before,” said Robert Heck, vice president of mortgages at Morty, an online marketplace, told Yahoo Money. “It’s not huge, but we definitely see this pickup as an option.”
As buyer demand slowed, home prices also slowed.
Median home price fell to $435,000 in August, according to Realtor.com, down from $449,000 last month and June’s record high of $450,000.
“We’re starting to see house price appreciation or decline accelerating, or at least decelerating,” Heck said.
Yet house prices remain 36.9% higher than in August 2019 and pose a challenge for first-time buyers. At last week’s rate of 5.55%, the median monthly payment for a typical home was $2,050, about 61% more than a year ago.
“The combination of higher interest rates and higher house prices has really reduced affordability,” said Keith Gumbinger, vice president of HSH.com, told Yahoo Money. “We’re talking about income needed to buy homes that is 30% or 40% higher right now than it was this time last year. And yes, people get raises and so on, but nobody’s salary goes up 30 or 40 percent in a year.
Door-to-door sellers adjust their price expectations
As more and more buyers hesitate, sellers have become more open to negotiation.
Nearly 1 in 5 homes on the market saw their listing price reduced in August, according to Realtor.com. Another one 92% of sellers agreed to buyer-friendly terms last month agreeing to contingencies such as home inspections and appraisals, with all sellers surveyed saying they had agreed to carry out some repairs when asked.
The new bargaining power is reflected in the numbers: at least 67% of buyers said they asked for repairs in August, compared to 31% who asked six to twelve months ago.
“We’ve got quite a dramatic change in the market this year in terms of infrastructure, certainly house prices, and the affordability equation has changed significantly year-to-date to where we’re at. are currently,” Gumbinger said. “We’re kind of in a period of adjustment right now. I don’t know if the conditions will necessarily stay that way forever, [but] right now we are slowing down.
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.