Homebuyers again retreat to the sidelines as higher rates crimp affordability

Homebuyers started the year on a positive note when declining mortgage rates signaled increasing affordability.

Mortgage applications rose 28% in one week in the middle of January as rates dipped to 6.2%.

But that frenzy of activity was short-lived as homebuyers are pulling back once again, reversing a trend seen earlier this year.

As the average rate on a 30-year fixed rate mortgage climbed up at 6.65%, its highest level since early November when rates topped 7%, loan application volume decreased 6%, according to the Mortgage Bankers Association.

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Mortgage application volumes were 44% lower than the same week one year ago. The Refinance Index also decreased 6% from the previous week and was 74% lower than the same week one year ago as a majority of homeowners are already locked into lower rates.

“There has now been three straight weeks of declines in applications as mortgage rates have jumped 50 basis points over the past month,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Data on inflation, employment, and economic activity have signaled that inflation may not be cooling as quickly as anticipated, which continues to put upward pressure on rates.”

Eroding affordability for homebuyers

The rate hikes are not only impairing the ability of first-time buyers from entering the housing market, it is also making it difficult for repeat buyers with existing mortgages at less than half of current rates.

The average mortgage rate is nearly three percentage points higher than it was last year at this time, and the monthly payment for a typical homebuyer has risen by nearly $700, a more than 40% increase, says Bright MLS Chief Economist Lisa Sturtevant.

At today’s rates, home prices would have to fall by 30% for homebuyers who are purchasing the median-priced home to have the same monthly payment they would have had a year ago.

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Why aren’t home prices falling further?

The median existing-home sales price in January increased 1.3% from one year ago to $359,000, according to the National Association of Relators.

While prices are down from their summer peaks and price growth has declined significantly, the median home price nationally is slightly higher than it was at the beginning of 2022. There are two reasons for this price stability – record low inventory and record high equity, says Sturtevant.

“Buyers are still competing for very few homes in the market which keeps upward pressure on prices. At the same time, repeat buyers are able to roll significant housing equity into their home purchase, basically “buying down” the higher rate to make their new home purchase more affordable,” she says.

If rates remain elevated, there are going to be fewer buyers who are able – and willing –to compete and therefore we could see home prices come down.

“But right now, the underlying fundamentals are strong demand, low supply, and the outlook is still for a surprisingly resilient spring housing market.” she says.

Why is there so much uncertainty in the housing market?

As we started the year, the 30-year fixed-rate mortgage decreased with expectations of lower economic growth, inflation and a loosening of monetary policy. However, given sustained economic growth and continued inflation, mortgage rates boomeranged and are inching up toward seven percent, according to Freddie Mac.

Mortgage rates have been trending higher over the past few weeks, and the Federal Reserve has indicated it will raise rates at least two, and possibly three, more times this year, which could send mortgage rates higher still.

Swapna Venugopal Ramaswamy is a housing and economy correspondent for USA TODAY. You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.

This article originally appeared on USA TODAY: Real estate housing market: Mortgage rates crimp affordability. Again.