(Bloomberg) -- A recent surge in US mortgage rates has pushed affordability to the lowest level in nearly four decades. For house hunters, waiting for any relief is a risky gamble.
It's been a hard lesson. Last year's slowdown brought a brief respite from the price gains of the pandemic boom but that's now vanished, with home values recovering the nearly $3 trillion they'd lost.
Now, one measure of borrowing costs has climbed to a level not seen in more than two decades, and the Federal Reserve has indicated it may hike rates further, raising the risk that mortgage rates may push toward 8%.
“The resilience of the economy and the consumer has confounded a lot of people,” said Melissa Cohn, regional vice president at William Raveis Mortgage. “At the beginning of this year, people were predicting that the Fed would actually be cutting rates by the end of the year, but the economy has withstood this higher-rate environment.”
Mortgage rates — at the heart of the past year's housing slowdown — have pushed higher as the Fed raised its benchmark rate. According to minutes from its July meeting, policymakers saw “significant upside risks to inflation,” suggesting even more increases ahead and further upward pressure for mortgage rates.
On Thursday, Freddie Mac's average rate on a 30-year, fixed loan jumped to 7.09%, the highest since 2002. Another measure — from the Mortgage Bankers Association — showed the average contract rate on a 30-year fixed mortgage rising to 7.16% in the week ended Aug. 11.
Some buyers with low credit scores and high debt-to-income ratios are getting quotes in the 8% range, according to Cohn. Borrowers who are moving ahead on mortgages right now are forging ahead with hopes to refinance when rates fall in a year or two, Cohn said. They're also confident that buying now will get them lower prices than they'd secure if rates ease and buyers rush into the market.
For now, potential buyers are facing “a lot of mixed messages,” according to Bess Freedman, chief executive officer of real estate brokerage Brown Harris Stevens. Consumers don't know if the Fed is going to keep raising rates or what else is on the horizon, she said. “There's been a meaningful change in the economy,” she said Thursday on Bloomberg Television. “We've avoided a recession, inflation has come down. But for housing, we're still in a sluggish market. We're not out of the woods yet.”
On Edge
House hunters are already battling for scarce inventory. Many homeowners have been reluctant to list their properties and give up lower mortgage rates than they could get now. Elevated prices spurred by the supply crunch are combining with higher rates to make this the least-affordable housing market since 1984, according to Optimal Blue rate-lock data from Black Knight Inc.
“This inventory issue is a really difficult one and is emerging as something akin to a structural problem,” said Mark Hamrick, senior economic analyst at Bankrate.
Read More: Only 16% of Californians Can Afford to Buy a Home as Rates Rise
Tight inventory is also limiting sales for previously owned homes. Transactions for existing homes fell nearly 19% in June from a year earlier, data from the National Association of Realtors show.
If rates move higher, borrowing costs may sideline more buyers, pressuring transactions which could ultimately push down prices, according to Andy Walden, Black Knight's vice president of enterprise research strategy. But any softening of demand has collided with tight inventory, keeping prices firm “for the time being,” he said.Mortgage costs are a “heavy burden,” according to Mark Zandi, chief economist at Moody's Analytics.“The market seems to be incredibly on edge with regard to rates,” Zandi said. “When you get to 7% plus, the market goes dark. Affordability is too far out of reach. That's when house prices resume declining.”
(Updates with comment from brokerage CEO starting in eighth paragraph.)
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