Economist: Mortgage Rates Hurt Buyers More than Home Prices

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As the average for a 30-year loan rises again, higher borrowing costs have triple the impact on monthly mortgage payments.

By Melissa Dittmann Tracey

Mortgage rates were back on the rise this week, hitting an average of 5.55%, Freddie Mac reported in August. Rates are nearly double what they were a year ago, and the latest housing data from the National Association of Realtors® demonstrates the impact of the jump in borrowing costs. The nation is witnessing a “housing recession,” said NAR Chief Economist Lawrence Yun, as existing-home sales plummeted 20% year over year in July, according to NAR data. Contract signings also dropped 20% in the same month. And there’s been a significant pullback in the new-home market—sales in the sector were down 30% annually in July—causing homebuilder sentiment to slide for the eighth straight month. Further, “apart from rising mortgage rates, home prices continue to show double-digit year-over-year gains,”

Nadia Evangelou, NAR’s senior economist and director of forecasting, said. A median-priced home is worth about $40,000 more than a year earlier. While home price increases add to home buyers’ costs, the impact of higher mortgage rates is much more—triple the impact on a monthly mortgage payment, Evangelou noted. An increase of just one percentage point in mortgage rates has the same effect on mortgage payments as if home prices rose by 13 percentage points. Homes haven’t been this unaffordable since 1989, NAR reports. Rising mortgage rates have made home loans more expensive, adding to the cost of homeownership. The typical monthly mortgage payment was nearly $2,000 in June, up 54%—or $679—compared to a year ago. “The combination of higher mortgage rates and the slowdown in economic growth is weighing on the housing market,” said Sam Khater, Freddie Mac’s chief economist. “Home sales continue to decline, prices are moderating, and consumer confidence is low. But amid waning demand, there are still potential home buyers on the sidelines waiting to jump back into the market.” Freddie Mac reports the following national averages with mortgage rates for the week ending Aug. 25: 30-year fixed-rate mortgages: averaged 5.55%, with an average 0.8 point, up from last week’s 5.13% average.

The typical monthly mortgage payment was nearly $2,000 in June, up 54%—or $679— compared to a year ago.

Last year at this time, 30-year rates averaged 2.87%. 15-year fixed-rate mortgages: averaged 4.85%, with an average 0.8 point, up from last week’s 4.55% average. A year ago, 15-year rates averaged 2.17%. 5-year hybrid adjustable-rate mortgages: averaged 4.36%, with an average 0.4 point, dropping from last week’s 4.39% average. A year ago, 5-year ARMs averaged 2.42%. Freddie Mac reports commitment rates along with average points to better reflect the total upfront cost of obtaining a mortgage. Reprinted from Realtor® Magazine Online, August 2022, with permission of the National Association of Realtors®. Copyright 2022. All rights reserved.

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