With mortgage rate topping 7%, what will it take to soften the market?

Only an uptick in inventory will help buyers find more affordable
house payments.

By JEFF LAZERSON | jlazerson@mortgagegrader.com | MortgageGrader.com | April 24, 2024

Article originally posted in Orange County Register on April 18, 2024.

Mortgage rates have exploded, again.

Last week, the Freddie Mac 30-year fixed was 6.88%. This week, it landed at 7.1%, or 22 basis points higher.

Just a week ago, the principal and interest payment on a $750,000 loan was $4,929 on a 30-year fixed rate, assuming a 6.88% rate. This week, that principal and interest payment is $5,040 or $111 more per month.

“The 30-year fixed-rate mortgage surpassed 7% for the first time this year,” said Sam Khater, chief economist at Freddie Mac. “As rates trend higher, potential homebuyers are deciding whether to buy before rates rise even more or hold off in hopes of decreases later in the year. Last week, purchase applications rose modestly, but it remains unclear how many homebuyers can withstand increasing rates in the future.”

On Thursday, April 18, Redfin reported the cost of buying a home hit a new record high. The combination of high mortgage rates and prices brought a homebuyer’s median monthly house payment to a record $2,775, up 11% year over year (nationally). Redfin’s mortgage rate number is slightly higher, at 7.4%.

There are signals that buyers are out there touring homes despite rising rates.

Mortgage-purchase applications are up 5% week over week, and Redfin’s Homebuyer Demand Index — a measure of requests for tours and other buying services from Redfin agents — is near its highest level in seven months.

“Some house hunters are hoping to buy now because they’re concerned rates could rise more, and others have grown accustomed to elevated rates and pushed down their home-price budget accordingly,” said Chen Zhao, economic research lead, Redfin.

On Tuesday, April 16, Jerome Powell, chairman of the Federal Reserve, hinted any rate breaks won’t come until the end of 2024 as inflation remains stubbornly high.

“Recent data have clearly not given us greater confidence” that inflation is coming fully under control and “instead indicate that it’s likely to take longer than expected to achieve that confidence,” Powell said.

The inventory of homes for sale is still very slim. Despite higher mortgage rates, home prices in Orange County, for example, aren’t falling.

According to Reports on Housing, in order for the housing market to tip in the favor of buyers, the fervor in the housing market must cool considerably. Cooler temperatures can only be achieved with a sharp increase in the inventory, which last occurred in 2022 when rates initially surged higher.

In 2024, rate volatility subsided somewhat and demand began climbing, but for-sale home inventory has only risen slightly (even falling by 3% in the past couple of weeks), according to Steven Thomas, author of Reports on Housing.

I can’t think of a scenario besides a continuum of rising mortgage rates where the inventory level of homes for sale is going to significantly grow anytime soon. Yet, folks are still buying, either with cold hard cash or with a mortgage.

Freddie Mac rate news: The 30-year fixed rate averaged 7.1%, 22 basis points higher than last week. The 15-year fixed rate averaged 6.39%, 23 basis points higher than last week.

The Mortgage Bankers Association reported a 3.3% mortgage application increase compared with one week ago.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $766,550 loan, last year’s payment was $361 less than this week’s payment of $5,151.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 6.25%, a 15-year conventional at 6%, a 30-year conventional at 6.75%, a 15-year conventional high balance at 6.375% ($766,551 to $1,149,825 in LA and OC and $766,551 to $1,006,250 in San Diego), a 30-year-high balance conventional at 7% and a jumbo 30-year fixed at 7.125%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $766,550 in LA, San Diego, and Orange counties.

Eye-catcher loan program of the week: A 30-year jumbo with 30% down at 6.5% adjustable after five years with one point.

Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.

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Jeff Lazerson - Mortgage Columnist since 2011