Mortgage rates rose to a 23-year high this week, dealing another blow to the housing market.
According to Freddie Mac, the interest rate on an average 30-year fixed-rate mortgage rose to 7.31% from 7.19% the previous week. That’s the highest rate since mid-December 2000, when it averaged 7.42%.
Rates followed the 10-year Treasury yield rising to its highest level since 2007 on Wednesday as concerns grew over a possible U.S. government shutdown. The development also comes a week after the Federal Reserve indicated it would keep its key interest rate higher for longer.
Read more: Mortgage rates at over 20-year high: Is 2023 a good time to buy a home?
For homebuyers, the rise in interest rates has once again weakened their purchasing power and was a good reason to stay on the sidelines. Meanwhile, those still in the hunt could face even higher interest rates.
“Will higher interest rates have a significant impact on buyers? The answer is yes,” Jason Sharon, owner of Home Loans Inc., told Yahoo Finance. “Will it destroy the real estate market? No way. However, it is putting a lot of pressure on the brakes.”
“Fewer buyers in the market”
The increased interest rates continued to depress purchasing demand.
Mortgage purchase application volume fell a seasonally adjusted 2% from the previous week, the Mortgage Bankers Association (MBA) survey for the week ending September 22 showed. Overall, purchasing demand was 27% lower than in the same week last year.
“There are currently fewer buyers actively looking for homes, which means less competition,” Beatrice de Jong, a real estate agent at The Beverly Hills Estates, told Yahoo Finance.
Inventory is actually growing because so many buyers have exited the market, Altos Research CEO Mike Simonsen wrote in his weekly analysis, an unusual occurrence this time of year. But when it comes to new listings, “there are still 9-10% fewer homes for sale each week than last year,” he wrote.
The story goes on
Read more: How to buy a house in 2023
Potential home buyers leave a property for sale during an open house in a Clarksburg, Maryland, neighborhood on September 3. (Source: Roberto Schmidt, AFP ivia Getty Images)
That’s because many homeowners are hesitant to sell their homes and lose their current mortgage rate, which is far lower than the current one.
“Eighty percent of homeowners with a mortgage have a mortgage interest rate below 5%,” Orphe Divounguy, senior economist at Zillow, told Yahoo Finance. “These homeowners have little incentive to sell, trading their low monthly housing costs for the much higher housing costs they would face as buyers in today’s mortgage rate environment.”
This supply-demand dynamic is evident in the latest sales data. Sales of new homes stalled in August. Pending home sales – an indicator of future closed sales – plunged during the month, while closed home sales fell to a seven-month low.
Currently, the inventory scenario is helping to support prices.
According to the National Association of Realtors, the average price for a resale home sold in August was $407,100, the highest in August and the fourth highest ever. Overall, house prices hit a new record in July after rising month-on-month for six consecutive months.
A woman checks the offers from a real estate agency. (Image credit: William West, AFP via Getty Images)
But the market could change completely if interest rates continue to rise.
A real estate economist warned last week that mortgage rates could reach 8% after Federal Reserve Chairman Jerome Powell suggested the high interest rate environment would remain.
Read more: What the Fed’s pause on rate hikes means for mortgage rates and loans
Homebuilders, who until recently were seeing sales surge as buyers exited the dismal resale market, are already increasing their incentives to lure buyers. In September, 32% of builders lowered their home prices, compared to 25% the previous month, according to NAHB. This is the largest proportion of builders who have reduced prices since December 2022 (35%).
A separate survey by Altos Research found that 37% of the market took a price cut for the week ending Sept. 25, more than any other year in recent years except last year at this time.
“A normal, balanced market will have price reductions of approximately 30-35% of homes for sale with price reductions,” Simonsen wrote. “As it approaches the 40 percent mark, that is a clear indicator that buyers are making fewer offers.”
Gabriella Cruz-Martinez is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
Click here for real estate and housing market news, reports and analysis to help you make your investment decisions.