Mortgage rates drop as concerns emerge about the US economy

The 30-year mortgage averaged 5.30% in the week ending July 28, down from 5.54% in the previous week, according to Freddie Mac. That’s still much higher than this time last year when it was 2.80%.

Prices rose sharply at the start of the year, reaching 5.81% in mid-June. But since then, concerns about inflation and the possibility of the US economy entering a recession have made it more volatile.

Sam Khater, chief economist at Freddie Mac, said home buying continues to decline as buyers face higher rates, record high home prices, increased risks of a recession, and waning consumer confidence.

“It is clear that over the past two years, the combination of the pandemic, lower mortgage rates, and the opportunity to work remotely have increased demand,” Khater said. “Now, as the market adjusts to a higher rate environment, we are seeing a period of contraction in sales activity until the market returns to normal.”

Mortgage rates fell as investors expected a 75 basis point rate hike from the Federal Reserve at its meeting on Wednesday. This was the second hike of this magnitude in several months.

The Federal Reserve does not directly determine the interest rates that borrowers pay on mortgages. Instead, a mortgage Interest rates tend to follow the 10-year US Treasuries, which fell last week before the central bank meeting. But they are indirectly affected by the Fed’s efforts to tame inflation.

As the Federal Reserve said on Wednesday that He. She It may ease the pace of interest rate increases in the coming months.

“The statement was welcomed by financial markets as an indication that the Fed expects inflation to slow significantly, which requires a less aggressive response,” said George Ratio, director of economic research at “These moves are expected to maintain upward pressure on borrowing costs, including mortgage rates, moving forward.”

Borrowing costs are growing

Ratio said consumers will feel the impact of the Fed’s increase over the next two months, with higher credit card interest rates and new auto loan rates in the next few billing cycles.

How many homes can I afford?

“Borrowers with adjustable rate mortgages – or those who expect to sign up for one soon – can expect a rate hike,” he said.

The higher costs of home financing are already having an impact. Buyers find homes less expensive because inflation takes a greater part of their income and the increased cost of borrowing has reduced their purchasing power.

A year ago, a buyer who paid a 20% discount on a $390,000 median home and financed the rest with a 30-year mortgage at a 2.80% fixed interest rate received a monthly mortgage payment of $1,282, according to the figures. From Freddy Mac.

Today, a homeowner who buys a home at the same price at an average rate of 5.30% will pay $1,733 per month in principal and interest. That’s an extra $451 each month.

Demand among buyers subside

As a result of the rising cost of buying a home, the demand among buyers has slowed and many sellers are seeing their properties stay longer in the market.

“For those who are motivated to sell, price cuts have become a strategy to go from,” Ratio said. “We can expect the housing market to continue to rebalance and accelerate, especially as we look into the fall and winter.”

The Fed’s moves are designed to curb inflation by reducing demand.

While home prices continued to rise to record levels in June, the number of sales fell.

Mortgage applications are also falling, falling last week for the fourth consecutive week, according to the Mortgage Bankers Association.

“Increased economic uncertainty and prevailing affordability challenges are discouraging households from entering the market, leading to a downturn in purchasing activity approaching the lows last seen at the start of the pandemic,” said Joel Kahn, associate vice president of economic and industrial forecasting at the MBA. “.

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