Mortgage Rates Continue Upward Climb, but Home Prices Decelerate | Mortgages and Advice

Mortgage rates rose for the second week in a row, according to Freddie Mac, with rates on a 30-year mortgage averaging 5.66%. That’s nearly double the 2.87% interest rate seen during the same week last year. Rates also rose for 15-year fixed and 5/1 adjustable-rate mortgages – both of which have substantially higher borrowing costs compared with just a year ago. Here are the current mortgage interest rates, as of Sept. 1:

  • 30-year fixed: 5.66% with 0.8 point (up from 5.55% a week ago, up from 2.87% a year ago).
  • 15-year fixed: 4.98% with 0.8 point (up from 4.85% a week ago, up from 2.18% a year ago).
  • 5/1-year adjustable: 4.51% with 0.4 point (up from 4.36% a week ago, up from 2.43% a year ago).

Erika Giovanetti

“The market’s renewed perception of a more aggressive monetary policy stance has driven mortgage rates up to almost double what they were a year ago. The increase in mortgage rates is coming at a particularly vulnerable time for the housing market as sellers are recalibrating their pricing due to lower purchase demand, likely resulting in continued price growth deceleration.”

– Sam Khater, Freddie Mac’s chief economist, in a Sept. 1 statement

This summer’s higher interest rates translate to inflated borrowing costs for mortgage applicants. Last year, when 30-year fixed mortgage rates averaged 2.87%, a homebuyer purchasing a $350,000 property with 20% down could expect a monthly principal and interest payment of $1,160. But with today’s average rate of 5.66%, those monthly payments for the same loan would be considerably higher at $1,618.

Week of Sept. 2, 2021Week of Sept. 1, 2022
Average Mortgage Rate2.87%5.66%
Monthly Principal & Interest Payment$1,160$1,618
Total Interest Paid$138,142$302,509
Total Mortgage Cost$418,142$582,509

*Borrowing costs for a $350,000 property on a 30-year fixed-rate mortgage with a 20% down payment.

As a consequence of much higher mortgage rates, homebuyers have had to adjust their expectations when it comes to maximum loan amount. To keep monthly payments about the same as before ($1,155 per month), a borrower with 20% down today would need to look at a home price of $250,000.

The strength in demand for lower-priced homes has led sellers to “recalibrate” their pricing strategy, as Khater says above. There simply aren’t as many buyers who can afford the monthly payments on a $350,000 home compared with this time last year. And as you’ll see below, this has led to a noteworthy slowdown in home price growth.

Indicator of the Week: Home Price Deceleration

We now (finally) have concrete data from the Federal Housing Finance Agency that home price growth has meaningfully slowed. The index still hasn’t yet posted a loss – home prices rose 0.1% between May and June – but it’s a significant decline from the about 1.5% monthly growth seen in 2022 so far.

The slowdown in home price growth has led FHFA officials to declare home price deceleration, a welcome reprieve from the past two years of unsustainable levels of appreciation.

Erika Giovanetti

“Housing prices grew quickly through most of the second quarter of 2022, but a deceleration has appeared in the June monthly data,” FHFA supervisory economist William Doerner says in a news release. “The pace of growth has subsided recently, which is consistent with other recent housing data.”

There’s a real possibility that home price growth will slow even more during the rest of the third quarter of the year, from July through September. It’s even plausible that home prices will decline during this time, but there’s no indication yet that future depreciation will erase the five- and six-figure equity gains many homeowners made over the past several years of rapid appreciation.

While this data may send signals of a housing recession for the nation’s homebuilders – an indicator mentioned in last week’s column – it may be good news for the many prospective buyers who had previously been priced out of the market due to the one-two punch of rising home prices and higher mortgage rates.

As home price growth moderates, homebuyers who had been waiting on the sidelines may be able to jump into a more balanced market. But the unfortunate reality is that these buyers may never get a chance to lock in a sub-3% rate for a 30-year mortgage, which will keep their monthly payments elevated despite cooling home prices. Mortgage rates are likely to stay higher until inflation reaches a more sustainable level, and that could take several years.

The good news: Homebuyers can potentially take advantage of a refinance a few years down the line, giving them an opportunity to reduce future borrowing costs while starting to build wealth through homeownership today.

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