Mortgage rates are up, but home prices may have peaked — just as debt forgiveness frees up more cash

‘We are at the turning point’: Mortgage rates are up, but home prices may have peaked — just as debt forgiveness frees up more cash

‘We are at the turning point’: Mortgage rates are up, but home prices may have peaked — just as debt forgiveness frees up more cash

U.S. mortgage rates have spiked to their highest level in two months, dealing another blow to the slower-moving housing market.

The rate on America’s most popular home loan, the 30-year fixed-rate mortgage, is almost double where it was a year ago at this time, new data shows.

Add that to other factors, and the once red-hot real estate market is now simply steamy.

“The combination of higher mortgage rates and the slowdown in economic growth is weighing on the housing market,” says Sam Khater, chief economist of finance housing giant Freddie Mac.

“Home sales continue to decline, prices are moderating, and consumer confidence is low.”

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30-year fixed-rate mortgages

The interest rate on a 30-year fixed-rate mortgage this week averaged 5.55%, up from 5.13% last week, Freddie Mac reported on Thursday. A year ago at this time the 30-year rate was averaging 2.87%.

Rates followed higher 10-year Treasury yields, which tend to rise when investors begin to feel more confident about the economy.

While inflation has come down from its recent high, expectations that the Federal Reserve will continue raising interest rates and selling mortgage-backed securities are expected to keep upward pressure on borrowing costs, says George Ratiu, senior economist with

At the same time, President Joe Biden’s decision this week to cancel as much as $20,000 in student debt for millions of Americans could give some would-be buyers a reason to start shopping.

“The savings in monthly expenses would bolster household budgets straining against rising prices and rents,” Ratiu writes.

15-year fixed-rate mortgages

The average rate on a 15-year home loan rose to 4.85% this week, up from 4.55% last week. At this time last year, the 15-year rate was averaging 2.17%.

Though rates are down from their pandemic highs earlier this summer, borrowing costs — along with still-hefty home prices — are keeping potential buyers from signing contracts.

“We saw a significant decline in demand as many prospective buyers step to the sidelines in the face of steep increases in mortgage rates, significantly higher home prices, a volatile stock market and rising inflation,” Douglas Yearly, CEO of homebuilder Toll Brothers, said this week in a third-quarter earnings call.

“Buyer confidence was also impacted by the nonstop headlines about a softening housing market and by a general sense of uncertainty regarding the future direction of the economy.”

5-year adjustable-rate mortgage

Interest rates on five-year adjustable-rate mortgages fell slightly this week to an average of 4.36%, down from 4.39% last week. A year ago at this time, the 5-year ARM was averaging 2.42%.

Rates on adjustable mortgages start off lower than their fixed-rate cousins and then move up or down based on a benchmark like the prime rate.

With a 5/1 ARM, the interest rate is set for the first five years, and then it adjusts annually.

If rates were to fall after the initial period of an ARM, a borrower could potentially refinance into a lower rate at a longer term. Of course, the risk is that rates could also go higher.

Mortgage applications this week

Applications for mortgages to purchase homes and refinance loans fell last week, according to a widely followed report.

Total applications fell 1.2%, according to the latest weekly survey from the Mortgage Bankers Association (MBA).

Refis were down 3% compared to last week — and 83% down compared to this time last year. With rates trending higher, fewer homeowners can benefit from trading in their mortgage for a new one.

“Mortgage applications continued to remain at a 22-year low, held down by significantly reduced refinancing demand and weak home purchase activity,” says Joel Kan, the MBA’s associate vice president of economic and industry forecasting.

Home prices at or near their peak, report suggests

In a growing number of U.S. markets, home prices have likely peaked, an analysis by researchers at Florida Atlantic University and Florida International University shows.

The researchers found that the premium — or the percentage above the long-term price trend that a buyer must pay — has fallen in 27 markets from June to July. Average prices have declined in most of those markets as well. In June, premiums declined in 12 markets and average prices fell in just seven.

“The consistent increase in the number of premium downturns in our monthly reporting strongly suggests that individual housing markets are at, or will soon be experiencing, their pricing peaks,” says Ken Johnson, an economist at Florida Atlantic’s College of Business.

“We are at the turning point. The likelihood of significant price increases in the near future grows smaller by the day.”

Austin, Denver, Minneapolis, Los Angeles, Phoenix, Salt Lake City, San Francisco and Seattle are among the cities with falling premiums and prices.

The analysis, however, also shows that prices are still up in most cities. Eli Beracha of Florida International’s Hollo School of Real Estate doesn’t expect values to fall like they did during the housing downturn that ended in 2011.

“There simply is not enough inventory to go around,” says Beracha. “That undersupply will keep pressure on prices in many areas.”

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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