Mortga
ge rates have started falling after skyrocketing over this past year. The Mortgage Bankers Association (MBA) recently announced that the average 30-year fixed-rate mortgage fell to 6.49%, down from 6.67% the week earlier. This drop hasn’t helped increase mortgage applications, though, which stands 41% lower than this time last year.
“The economy here and abroad is weakening, which should lead to slower inflation and allow the Fed to slow the pace of rate hikes,” said Joel Kan, MBA’s vice president and deputy chief economist. “Purchase activity increased slightly after adjusting for the Thanksgiving holiday, but the decline in rates was still not enough to bring back refinance activity. Refinance applications fell another 13%, and the refinance share of applications was at 26%. Both measures were at their lowest levels since 2000.”
Record-low mortgage rates last year led to huge rises in home prices. With rates as low as 2.9%, many people could afford a home selling for $500,000. As mortgage rates rose, those same people were priced out of home ownership. According to the National Association of Realtors (NAR), a house is affordable if the monthly mortgage payment use 25% or less of a family’s monthly income. In September, home affordability dropped as mortgage payments rose by 57.8% and monthly income only rose 3.9%.
To give some price points, lets consider a house selling for $400,000. With an interest rate of 6.5% and 20% downpayment, monthly payments would be $2,023 without insurance or taxes. If the interest rate fell to 5.5%, the same home would cost $1,817 a month. At a rate of 4.5%, the monthly cost would drop to $1,621. The NAR expects housing affordability to sharply increase at this interest rate. Unfortunately, many realtors do not expect dramatically lower home prices or interest rates. Likely low housing stock will drive prices up.
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