As mortgage rates enter the ‘red zone,’ homebuyers find they can’t quite bully sellers hard enough to compensate

The average interest rate on America’s most popular home loan hit a 14-year high this week, pricing out even more would-be buyers amid a double whammy of high home prices and surging borrowing costs.

“The monthly payment that people have to shell out to buy that home is just unaffordable,” Mark Zandi, chief economist with Moody’s Analytics, said on the Plain English podcast.

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“Many potential first time homebuyers are now literally locked out of the housing market.”

And with this month’s surprisingly high inflation reading, borrowing costs could climb even higher as the Federal Reserve plans more hikes.

30-year fixed-rate mortgages

The average rate on a 30-year fixed mortgage hit 6.02% this week, up from 5.89% a week earlier and more than double what it was one year ago, mortgage finance giant Freddie Mac reported on Thursday.

“Mortgage rates continued to rise alongside hotter-than-expected inflation numbers this week, exceeding 6% for the first time since late 2008,” Sam Khater, Freddie Mac’s chief economist, says.

“Although the increase in rates will continue to dampen demand and put downward pressure on home prices, inventory remains inadequate. This indicates that while home price declines will likely continue, they should not be large.”

15-year fixed-rate mortgages

The interest rate on a 15-year fixed-rate mortgage averaged 5.21% this week, up from 5.16% last week, Freddie Mac reports.

A year ago at this time, the 15-year rate was averaging 2.12%.

The higher rates are hammering home sales, and sellers are having to cut their prices. That’s giving some buyers the upper hand in negotiations, but it’s not always enough.

“Unfortunately, it’s increasingly hard for buyers to make use of their newfound power thanks to the affordability pressures of rising mortgage rates and a dearth of homes being listed for sale,” Taylor Marr, deputy chief economist with Redfin, says in a market update.

“Today’s average buyer is paying less than the list price, but they continue to struggle to find a home that meets their criteria and budget.”

5-year adjustable-rate mortgage

The average rate on a five-year adjustable-rate mortgage (ARM) jumped to 4.93%, up from last week when it averaged 4.64%.

A year ago at this time, the 5-year ARM was averaging 2.51%.

ARMs start with lower rates than longer-term loans, but after their initial terms, they adjust each year — up or down — in lockstep with the prime rate or another benchmark.

Borrowers can potentially refinance into a lower rate once the initial term ends, but that’s only if rates go down. They could easily go higher depending on the health of the economy.

Another dip in mortgage applications

Last week, mortgage applications fell 1.2% from the previous week, according to the latest survey from the Mortgage Bankers Association (MBA).

The decline was led by applications to refinance existing loans, which fell 4% from the previous week and were 83% lower than the same week last year.

Applications for mortgages to purchase homes were up, but by just 0.2%.

“Higher mortgage rates have pushed refinance activity down more than 80% from last year and have contributed to more homebuyers staying on the sidelines,” Joel Kan, MBA’s associate vice president of economic and industry forecasting, said this week.

Rates falling into ‘red zone’

Phoenix real estate agent Joe Bourland says affordability went by the wayside when mortgage rates started turning up earlier this year — and the market is feeling it.

“Once those rates really started increasing into the 5s, the market turned on a dime,” he says. “It was really dramatic.”

A buyer purchasing a median-priced home is now paying a monthly mortgage of $2,100, a 66% increase from last year, according to Realtor.com. And new listings have fallen for 10 straight weeks.

“We are entering a red zone on mortgage rates, as consumers will likely wait out the market if rates push up towards 7%,” says Corey Burr, senior vice president at TTR Sotheby’s International Realty in Washington, D.C.

“This level is massively higher than the rates seen just nine months ago, and the expensive carrying costs are shocking to most prospective buyers.”