Mortgage rates dropped again, so why are some borrowers on the sidelines?

Recent declines in mortgage rates, which are due to a slowdown in inflation growth, have been enough to convince some borrowers to apply for new home loans, according to recent data on mortgage applications. 

However, there are still forces pushing many borrowers — mainly lower-income buyers — to stay on the sidelines, industry experts say. 

The latest weekly survey data from Freddie Mac shows the 30-year fixed-rate mortgage slowed its downward trajectory this week, declining three basis points from last week to 6.41%. Rates averaged 3.10% at this time one year ago.

“Mortgage rates continued to tick down heading into the Thanksgiving holiday,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “In recent weeks, rates have hit above 7% only to drop by almost half a percentage point.” 

Other indexes show rates are slowly declining as well.

On HousingWire’s Mortgage Rates Center, Black Knight’s Optimal Blue OBMMI pricing engine measured the 30-year conforming rate at 6.58% on Tuesday, down from 6.62% the previous week. Meanwhile, the 30-year fixed-rate jumbo (greater than $647,200) went from 6.72% to 6.63% in the same period, according to the data. 

Mortgage rates differed slightly on other platforms, and were 6.65% for conforming loans at Mortgage News Daily on Tuesday. 

Is it “now or never?” 

As mortgage rates remain below 7%, some buyers are thinking “it’s now or never” if they want to buy this year, Lisa Sturtevant, chief economist at Bright MLS, said in a statement. 

“So, while the typical monthly payment is still nearly 60% higher than it was a year ago, buyers have begun to accept the new market environment and could be grateful for a little relief on rates,” Sturtevant said.

The Mortgage Bankers Association’s data this week showed an increase in the demand for mortgage loans. The market composite index, a measure of mortgage loan application volume, rose 2.2% for the week ending November 18 after registering a 2.7% increase the previous week. Compared to the same week in 2021, however, the index fell by 67.8%.   

“Following generally higher mortgage rates throughout the course of 2022, the recent swing in buyers’ favor is welcome and could save the buyer of a median-priced home listing more than $100 per month relative to what they would have paid when rates were above 7% just two weeks ago,” Danielle Hale, chief economist at Realtor.com, said in a statement.  

Hale added that with mortgage rates averaging nearly three times higher than in a typical year, many potential shoppers have pulled back.

“A long-term housing shortage is keeping home prices high, even as the number of homes on the market for sale has increased, and buyers and sellers may find it more challenging to align expectations on price,” Hale said. “A cooling rental market, in which rent growth is moving back toward historical norms, may offer hesitant home buyers a refuge from which to regroup and perhaps reevaluate their plans in the new year.”

Holden Lewis, home and mortgage expert at NerdWallet, said this year’s steep rise in mortgage rates had a notable impact on middle-class home buyers. 

“Existing home sales were down 28% in the 12 months ending in October, and new home sales are skewing toward higher-income buyers. In October, 48% of new homes sold for $500,000 or more; a year earlier, the figure was 33%,” Lewis said in a statement.

What’s next for mortgage rates? 

Mortgage rates reflect the Federal Reserve’s ongoing increases in federal funds rate to tame inflation, and so far, it appears to be working. The U.S. Bureau of Labor Statistics reported last week that the consumer price index (CPI) rose 7.7% year over year in October, marking the smallest 12-month increase since the year ending in January 2022. 

But Fed chairman Jerome Powell noted in November the need for ongoing hikes in the federal funds rate, Hale said, and several Fed speakers have reiterated this position. 

“This could mean that mortgage rates may climb again, and that risk goes up if next month’s inflation reading comes in on the higher side,” Hale said.

Mortgage rate volatility makes it difficult for potential homebuyers to know when to get into the market, according to Khater. 

“That is reflected in the latest data, which shows existing home sales slowing across all price points,” Khater said. 

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