The average interest rate on the most popular US home loan climbed to its highest level since August 2008, data from the Mortgage Bankers Association (MBA) showed Wednesday.
Rising mortgage rates are increasingly weighing on the interest-rate-sensitive housing sector as the Federal Reserve pushes on with aggressively lifting borrowing costs to curb high inflation.
The average contract rate on a 30-year fixed-rate mortgage rose by 27 basis points to 6.52% for the week ended Sept. 23, a level not seen since the 2008-2009 financial crisis and the Great Recession.
Fed policymakers raised the central bank’s benchmark overnight interest rate by three-quarters of a percentage point last week, the third straight hike of that size, and acknowledged more rate hikes ahead for the economy as they seek to cool demand in order to bring down inflation.
Fed Chair Jerome Powell also explicitly called out the housing market and said it would probably go through a “correction” after a period of “red hot” price increases in recent years.
Expectations for Fed tightening have led to a surge in Treasury yields since the start of this year. The yield on the 10-year Treasury Note, which acts as a benchmark for mortgage rates, rose to 3.99% on Monday, the highest level since April 2010. The cost of home loans has risen by more than a percentage point over the past six weeks.
Not surprisingly, the jump from the low in 2021 near 2.7% to over 6.5% today (a multiple of 2.4 times) has led to a decrease in applications for mortgage loans and demand for residential homes.
The MBA said its Market Composite Index, a measure of mortgage loan application volume, fell 3.7% from a week earlier. Its Refinance Index dropped 10.9% from the prior week and is now at a 22-year low.
Existing-home sales decreased for the seventh straight month in August to a seasonally adjusted annual rate of 4.80 million. Sales tailed off 0.4% from July and 19.9% from the previous year.
The median existing-home sales price rose 7.7% from one year ago to $389,500 in August.
After five successive monthly increases, the inventory of unsold existing homes dwindled to 1.28 million by the end of August, or the equivalent of 3.2 months of supply at the current monthly sales pace.
Sales of newly built, single-family homes in August increased a surprising 28.8% to a 685,000 seasonally adjusted annual rate from an upwardly revised reading in July, according to newly released data by the Department of Housing and Urban Development and the Census Bureau. New home sales are down 14% on a year-to-date basis despite the August upturn.
Reflecting higher construction costs, the median new home price in August was $436,800, up 8.2% from a year ago. Despite the larger than expected rise in August, new home sales are expected to continue their downward trend, according to most housing forecasters.
“With housing affordability at a more than 10-year low and the Federal Reserve continuing to aggressively raise interest rates to rein in stubbornly high inflation, policymakers must find ways to reduce construction costs that are delaying home projects and putting upward pressure on home prices,” said Jerry Konter, chairman of the National Association of Home Builders (NAHB) and a home builder and developer from Savannah, GA.
“The sales gain in August reflects that there is clearly sidelined demand for housing, but it is being constrained by rising interest rates that are pricing many potential consumers out of the market, particularly entry-level buyers,” said NAHB Chief Economist Robert Dietz.
“After a brief lull when mortgage rates fell below 5.3% for much of August, they have since jumped much higher in September and are now approaching 7%. The Fed should take careful note of the weakening of the housing market given the policy lag involved with monetary policy. Housing is a leading indicator of economic conditions,” Dietz cautioned.
Dietz is correct: Housing is one of the leading indicators of the economy. It is widely agreed the housing sector accounts for 16%-18% of Gross Domestic Product. A case can be made that housing represents more than 16-18% of the economy if one adds in all the components which contribute to housing costs, including land, construction costs, selling fees, etc., etc.
The bottom line is, with mortgage rates and other interests rates going higher, this is not a good environment for the housing sector. While the home market has been in a frenzy for years, and while home prices continued to move higher in August, it is slowly transforming from a “sellers’ market” to a “buyers’ market.”
This can be a good thing or a bad thing, depending on which side of the table you’re on. But from the standpoint of the overall economy, the current trend in the housing sector is not a good thing.
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