U.S. Homebuyers on the Retreat as Mortgage Rates Surge

Paul Sparks

The number of Americans applying for home mortgages has plunged as rates surge. This signals apprehensions toward an increasingly unaffordable housing market.

Mortgage Applications Plunge

Data from the Mortgage Bankers Association (MBA) unveiled that mortgage applications have steadily declined for six consecutive weeks, hitting numbers reminiscent of 1995 figures. The week leading up to August 18 witnessed a 4.2% dip from its predecessor, and to add salt to the wound, the typical 30-year fixed mortgage rate has ascended to a staggering 7.31%. This marks the most significant spike since the dawn of the millennium.

The MBA’s Refinance index experienced a 6% dip from the preceding week and stood at 35% lower than 2022’s corresponding period.

This downward spiral can be attributed to a combination of deterrents. The sky-high rate environment coupled with diminishing purchasing power has evidently turned off potential homebuyers. A glaring lack of housing supply, which pushes property prices up, also presents a formidable barrier to many prospective homeowners.

Housing Affordability Crisis

The gravity of today's housing affordability crisis surpasses the levels observed before the 2008 financial meltdown. As per the Atlanta Fed's Home Ownership Affordability Monitor, there was a drop to 69.5 in June from 70.5 in May. By comparison, this metric reached its lowest at 71.5 in July 2006. HOAM index looks at how easy the median income can absorb housing costs. In other words, because median home prices vary by geography this gives a measure of the relative cost. 

Parallel data from the National Association of Realtors showcased a 2.2% reduction in existing home sales for July, a low unseen since the start of 2023. This, combined with a 14.6% year-over-year plummet in housing inventory, paints a bleak picture of the housing landscape.

Despite these indicators, Goldman Sachs' strategists remain somewhat bullish, expecting a 1.8% price surge in 2023, up from its initial 2.2% slide forecast. Goldman Sach’s  optimism is based on record-low listings, which sustain positive net absorption, even in light of the paltry purchase application volume.

The Mortgage Rate Conundrum

A crucial driver of this housing downturn is surging mortgage rates, surpassing the intimidating 7% threshold. As the 10-year Treasury yield moves, influenced by concerns of persisting high inflation due to a booming economy, mortgage rates follow suit. The result? A stifling effect on demand during what should be a robust homebuying season.

This spike in rates means that potential buyers face monthly obligations that can be higher by $200-$300, which could be the deal-breaker for many, as Jason Mata from American Pacific Mortgage points out.

However, Some buyers are pivoting toward adjustable-rate mortgages (ARMs) to make their financials add up. These typically start with a rate lower than fixed-rate loans but adjust upwards after the initial fixed-rate phase. While this may seem like a viable solution now, with the 5/1 ARM average standing at 6.50%, it remains to be seen how sustainable this strategy will be in the long run.

In conclusion, the U.S. housing market is facing unprecedented challenges, with surging mortgage rates at the forefront. The repercussions of these trends on the broader economy and how long they will persist remain uncertain. As rates set new benchmarks, buyers will inevitably need time to adjust and accept these as the "new norm". Whether this will invigorate the market or lead to further stagnation is a story yet to unfold.


Market Insider

Yahoo Finance

Paul’s expertise lies in aligning capital and deals. His current mission is to bridge the gap between real estate and financial certainty, offering both active and passive investors the education needed for success in any market.

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