Key learning points
- Mortgage refinancing applications are down 88% since around this time last year, while new mortgage applications are also down 46% over the same period.
- It stems from rapidly rising rates, which have made mortgages hundreds of dollars more expensive for the average buyer on a monthly basis.
- The trend is likely to continue as the Fed plans more rate hikes in the coming months.
In recent weeks, demand for mortgages has risen slightly because mortgage interest rates have fallen. Still, demand for refinancing has all but disappeared due to higher rates, with current figures 88% lower than last year at this time.
New mortgage applications are not too bad, but they are still 46% lower than last year around this time.
Things have improved slightly in recent weeks, with mortgage applications up 2.2% in the week ending Nov. 18 and 2.7% the week before. However, it is the first bright spot in a while, with demand falling in nine of the previous ten weeks.
At the beginning of October, demand fell by no less than 14.2%.
What exactly is going on with the mortgage market and what does this mean for house prices in the short term?
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Mortgage rates have skyrocketed
In an effort to curb skyrocketing inflation, the Fed is playing hard with the central bank’s base rate. There have now been four consecutive rate hikes of 0.75 percentage points, the fastest rate hike in the past 35 years.
Naturally, this rapid change has spilled over to mortgages.
The Fed base rate is what all other debt in the economy is priced at. Everything from mortgages to credit cards to personal loans to student loans is affected by the base rate, which is essentially the rate the banks themselves pay.
With such a rapid rise in base rates, mortgage payments have skyrocketed compared to around this time last year. According to Freddie Mac, the current average rate for a 30-year fixed-term mortgage is 6.58%. Around this time last year, that same average was just 3.10%.
The average mortgage interest rate has therefore more than doubled in the past 12 months. That is a big dent in the household budget.
In dollar terms, a $400,000 30-year mortgage at a rate of 6.58% would mean a monthly mortgage payment of $2,549. Change that interest rate to 3.10% and the monthly payment figure works out to $1,709.
That’s $840 more than a household should pay for the same property, at a time when prices for everything else are rising and layoffs are in many industries.
Mortgage demand has fallen sharply
With rates rising so sharply, it’s no surprise that demand for mortgages has fallen. Existing homeowners who would consider an upgrade may find themselves stuck in their current home simply because moving would mean refinancing and a much more expensive mortgage.
This type of move is often a discretionary one. Most families can get by in their existing home, even if they want to move to a different neighborhood or something bigger. It means that demand is flexible based on market conditions.
For first-time homebuyers, they may not have a choice. Even for those who have saved diligently for years, the latest increases in mortgage payments may mean putting their original plans on hold.
They are faced with a situation where the exact same house with the exact same mortgage is now significantly more expensive than a year ago.
Even if they want to make a purchase, banks are probably less willing to lend for reasons of affordability.
All in all, it’s no surprise that we’ve seen demand fall off a cliff.
What does this mean for the housing market?
Well, it’s pretty simple math that if fewer mortgages are sold, fewer homes will be sold. And that’s exactly what happened.
Existing home sales have fallen sharply month over month since the start of 2022, falling another 5.9% in October, according to the National Association of Realtors. Apart from a short pause at the start of the pandemic, they are at their lowest level since 2011.
Despite the major slowdown in activity, prices have not yet followed suit. Reduced inventory levels in the market have allowed values to hold up so far, with a median existing home price of $379,100 in October. That is 6.6% more than a year ago, despite a 28.4% decline in the number of transactions over the same period.
There are questions about how long this can go on. Demand is currently at a historically low level. Despite the uptick in recent weeks, the trend is more likely to continue downward. Obviously this is not guaranteed, but the Fed has made it clear that they are not done raising rates just yet.
Given that rising interest rates are to blame for the slowdown, it stands to reason that continuing down this path will put more pressure on real estate.
As long as demand remains low, sellers will eventually have to lower their prices to keep sales going. While many homeowners can hang on and wait for prices to recover, others are forced to sell or are simply willing to take a discount to get the home sold.
In short, we won’t see a boom in the housing sector anytime soon, and it could get worse before it gets better.
What does this mean for potential starters?
In many ways, first-time buyers are most affected by these rate hikes. Existing homeowners may prefer a bigger or better home, but the reality is that in most cases they can continue their normal life in their existing home.
The same cannot be said of those living in less secure housing. Those who live in rented accommodation are at the behest of their landlords, and even adults who live at home longer than they planned are likely to put other areas of their lives on hold until they can afford to move.
Really one of the only ways to improve the situation is to make more money or improve the amount you have available for a down payment. We can’t help with the former, but for potential new buyers, we may be able to help raise the deposit.
If your timeline for a purchase is less than 1-2 years, the truth is that you should stick to cash-based investments like CDs. One of the positive side effects of rising interest rates is that interest rates on these have also risen, although it’s still nothing to write home about.
For those who have 3 years or more before planning to buy a home, investing may become an option to consider.
You want to properly manage the risk in your portfolio because the last thing you want is major volatility in the nest egg used to buy your home. We use the power of AI to select the best investment in our kits, with a great example of a lower risk option being our Active Indexer Kit.
In this kit, our AI analyzes thousands of individual data points each week and then predicts the performance and volatility of large cap stocks, small cap stocks and technology stocks. Then these areas and individual companies are automatically weighted based on the predictions.
For investors who want an even bigger safety net, they can also add Portfolio Protection. This uses our AI to assess the portfolio’s sensitivity to different forms of risk, such as interest rate risk, general market risk and oil risk. It then automatically implements advanced hedged strategies to offset them.
It’s advanced stuff because investors who have something as important as a home on the line, it’s important to have the best tools available to them.
Download Q.ai today for access to AI-powered investment strategies.