Mortgage rates topped 7% at the end of August for the first time since 2002, dismaying would-be homebuyers wishing they’d been able to get into a house in 2021 or so when mortgage rates were around 3%.
But there’s a glimmer of hope for stressed buyers. Freddie Mac (FMCC) – Get Free Report, one of the biggest sources of mortgage capital, reports that rates on 30-year mortgages hit a top of 7.23% the week of Aug. 24 and have drifted lower since.
According to Freddie Mac’s weekly rate survey, the rate on a 30-year mortgage was at 7.12% last week. If you expect to take out a $300,000 loan, the principal-and-interest payment at that rate would be $2,020 a month, compared with $2,042 at 7.23%. (That’s before taxes and insurance.)
The savings aren’t much — $22 a month. Maybe enough to buy the family a pizza.
And that’s the rub. Not only for you the buyer but for you the seller, too. Because if you’re selling a house or an apartment or building a house for a family, you want a buyer who can afford to close the deal.
But the fact that a decline is happening at all means buyers should be keeping an eye on rates and keeping in touch with lenders.
The Fed moved, finally, to attack inflation
Rates have surged since the end of 2021 as the Federal Reserve Board began to wage a holy war against the inflationary pressures set off by rates held too low for too long by central banks around the world and then the sharp post-pandemic recovery.
In total, the Fed has raised its key federal funds rate 11 times since early 2022 from 0.25% to 0.5% to 5.25% to 5.5% in July. The fed funds rate is the foundation rate from which all U.S. lending rates are built.
The rate surge made buying and owning a home far more expensive and depressed sales.
A loan taken out at 3% at the end of 2021 would have produced a monthly payment before taxes and insurance of about $1,265. In other words, that lovely 7.12% loan we mentioned above bumped your payment up nearly 60%.
(Things could be worse: In October 1981, the rate on a 30-year loan hit 18.63% — triggering a $4,680 monthly payment and a housing depression.)
Small wonder that owners who bought in 2020 and 2021 are in no rush to sell. That’s exacerbated tight housing markets in many markets.
The winners for now are home builders. The iShares U.S. Home Construction exchange-traded fund (ITB) – Get Free Report is up 39% this year.
Holdings include giant builders like D.R. Horton (DHI) – Get Free Report, PulteGroup (PHM) – Get Free Report, Lennar (LEN) – Get Free Report, Home Depot (HD) – Get Free Report and paint manufacturer Sherwin Williams (SHW) – Get Free Report.
Buying a house is toughest for the little guy
The biggest sales declines between July 2022 and July 2023, according to a July report from the National Association of Realtors, are among homes priced from $100,000 to $250,000, off 25% from a year ago. Home sales for $1 million-plus are off just 7.2%.
The hope is that the Fed is about to declare to victory or, at least, will stop raising its key rates so buyers can catch a break. Officials will meet Sept. 19-20 to make that decision.
Most economists see rates moderating, a polite way of saying they’re going to come down — but only a little. To around 6.8% over the next three to four months. That would cut your payment down to $1,955 a month. Still not gigantic but visible.
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