Mortgage rates surged higher this week, closing in on 7%, further cementing affordability concerns in the housing market.
The average rate on the 30-year fixed mortgage increased to 6.73% from 6.65% the week prior, according to Freddie Mac. Rates have climbed nearly three-quarters of a point since the beginning of February.
The jump in rates continued to fuel the standoff between price-struck homebuyers and hesitant sellers, as elevated home prices weigh on already weak demand ahead of the spring season. Add to that the expectation that rates could soon crest 7% if inflation remains a top concern.
“It’s not just higher mortgage rates, but really the combination of higher mortgage rates and still higher home prices in most markets that are creating hurdles for buyers,” Realtor.com Chief Economist Danielle Hale, told Yahoo Finance. “Even though a greater share of home sellers in today’s market have adjusted their price lower, both listing and sale prices have continued to climb on a year-over-year basis.”
Buyers race against the clock
While the volume of applications to purchase a home increased by 7% for the week ending March 3, overall purchase activity was 42% lower than a year ago, the Mortgage Bankers Association latest survey found.
“Even with this jump in activity, both purchase and refinance applications remain well below year-ago levels when rates were much lower,” MBA President and CEO Bob Broeksmit told Yahoo Finance. “The recent increase in mortgage rates, right at the start of the busy spring buying season, could cause prospective buyers to delay decisions until rates moderate.”
Buyers still in the market also have to contend with higher list prices from sellers.
The national median listing price increased to $415,000 in February, Realtor.com data showed, up from $406,000 the previous month and up 7.8% year over year. That reverses several months of softening listing prices after peaking in June at $449,000, and could suggest that sellers are getting stubborn in offering incentives.
Without wiggle room on prices, buyers are seeing their purchasing power evaporate amid rising interest rates. For instance, the monthly mortgage payment for a median-priced home is 49% higher than a year ago at last week’s rate of 6.65%, according to Realtor.com.
Buyers are likely to face further affordability challenges entering the spring, Hale noted, because too-low inventory will continue to buoy home prices.
“One big reason that home prices continue to climb is that even though we have more homes for sale today, the market is still not back to what was common before the pandemic in most places,” Hale said. “And fewer homes for sale mean there’s still some pressure on prices even though buyers are more selective amid higher costs.”
As homebuyer demand remains weak, home sellers are feeling more pessimistic and are much less active than last year. There were 15.9% fewer homes listed for sale in February compared with last year, data from Realtor.com showed.
Meanwhile, there’s some evidence that sellers are a bit less generous with buyer incentives. For instance, 57% of builders used incentives to close sales in February, the National Association of Home Builders said, down from 62% in December and 59% in November.
A growing share of sellers are also pulling back on price reductions, more so than what is typical during this time of the year. According to Realtor.com, 13% of home sellers issued a price cut in February, up from 5.4% a year ago. Still, in January at least 15.3% of sellers lowered their prices to make a sale.
Where rates are headed
Mortgage rates have been marching higher since February after government data revealed the inflation remains a threat.
This week, Federal Reserve Chairman Jerome Powell made it clear to Congress that he isn’t ready to soften his aggressive fight on inflation, indicating that further rate hikes would likely be necessary as we enter the spring. That could likely keep mortgage rates higher.
Though “forecasting is far more art than science,” Keith Gumbinger, vice president of HSH.com, anticipates that mortgage rates are likely to climb higher before they retreat later this year.
“At present, and while there is a chance that rates could retreat to recent bottom levels or perhaps a little below at some point, much depends on what happens with prices, with the Fed, and ultimately whether or not the economy gets to a tipping point and starts to head into recession,” Gumbinger recently told Yahoo Finance.
Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
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