Assuming a 7.49% rate, a 30-year fixed mortgage for a $600,000 home nets the buyer a $4,191 payment. Last year, it was $2,418.
By JEFF LAZERSON | email@example.com | MortgageGrader.com | October 9, 2023
Article originally posted in Orange County Register on October 6, 2023.
Homebuyers have taken a timeout as rising interest rates smother the housing market.
On Thursday, Oct. 5, Freddie Mac pegged the average 30-year fixed rate at 7.49%, according to its weekly lender survey. The last time the rate was this high was December 2000.
A day later, the Bureau of Labor Statistics stunned with its September employment report. The U.S. added a booming 336,000 jobs — 69,000 more jobs than the 12-month moving average.
Forget a one-quarter point rate hike by the Federal Reserve before the end of the year. This new jobs information certainly puts us squarely at a one-half-point increase. The prime rate, I believe, will hit 9% before 2023 is done. Mortage rates for a 30-year fixed loan are going to top 8%.
Assuming a 7.49% interest rate, a 30-year fixed mortgage today on a $600,000 mortgage nets the homebuyer a $4,191 payment. Compare that to the all-time low Freddie rate of 2.65% in January 2021 and a payment of $2,418.
Mortgage borrowing costs for well-qualified borrowers have increased 73% in a little more than two and one-half years.
And this mortgage rate ascent has absolutely smothered the mortgage business.
“Mortgage applications grounded to a halt, dropping to the lowest level since 1996,” said Joel Kan, vice president and deputy chief economist at the Mortgage Bankers Association. “The purchase market slowed to the lowest level of activity since 1995, as the rapid rise in rates pushed an increasing number of potential homebuyers out of the market.”
I checked in with some of my industry peers to get their takes.
“The interest rate climb has directly affected the borrowing power of buyers, pricing many of them out of the market or searching for less expensive properties,” said Al Hensling, president, United American Mortgage. “Many who were just on the cusp of affordability are finding themselves reevaluating their options of purchasing at this time.”
“The challenge in Southern California, an area already experiencing a lack of housing for sale, is the fact that many would-be sellers are reluctant to give up their sub-4% mortgages to make a move further impacting buyers’ ability to find homes for sale,” Hensling said.
What about borrowers who can’t qualify for a good, albeit currently expensive, Freddie or Fannie conventional mortgage?
The exotic mortgage space, also known as non-prime or non-qualified mortgage, is where there is still a pulse of business volume.
“It’s not the rate. It’s can you get the deal done?” said Dean Ayres, senior vice president at Foundation Mortgage. “We’re seeing a lot of deals that were denied elsewhere for one reason or another with a ton of appraisal transfers.”
Ayres says his team learns ahead of time what the issues are. “Why did they deny it? What is the problem?”
Full disclosure: My mortgage company does business with Ayres. Foundation Mortgage offers non-qualified mortgages only.
And there’s something else brewing. Wholesale mortgage rates (those sourced by mortgage brokers) are shooting up at an astounding pace. Offering a borrower a zero-point loan is very expensive — to the tune of 8% on a 30-year fixed for a well-qualified borrower. (My advice: Don’t spend your money now on points because rates will likely be lower in a year, and you can refinance.)
For marginally qualified borrowers it’s nearly impossible to provide a zero-point loan due to the pricing adds.
Exotic mortgages can be north of a 10% interest rate. Yikes!
Nothing good is going to happen for homebuyers in the near term unless you trip on a distressed home seller.
With higher rates ahead, prices should flatten. I expect a hard recession next year.
Freddie Mac rate news: The 30-year fixed rate averaged 7.49%, 18 basis points higher than last week. The 15-year fixed rate averaged 6.78%, 6 basis points higher than last week.
The Mortgage Bankers Association reported a 6% mortgage application decrease compared to last week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $406 less than this week’s payment of $5,073.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 7%, a 15-year conventional at 6.75%, a 30-year conventional at 7.25%, a 15-year conventional high balance at 7.5% ($726,201 to $1,089,300), a 30-year high balance conventional at 7.625% and a jumbo 30-year fixed at 7.75%.
Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $726,200 in LA and Orange counties.
Eye catcher loan program of the week: A 30-year adjustable, interest-only and fixed for the first five years, rate at 7.5% with 1 point cost.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or firstname.lastname@example.org. His website is www.mortgagegrader.com.
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Jeff Lazerson - Mortgage Columnist since 2011