Published by Forbes.com | November 24, 2022
Given that rising interest rates are what has prompted the slow down, it stands to reason that continuing on this path will put more pressure on real estate.
Over the past few weeks mortgage demand has crept up slightly as mortgage rates have come down. Even so, the demand for refinancing has all but disappeared due to the higher rates, with the current figures 88% lower than this time last year.
It’s not quite so bad for new mortgage applications, but those are still down 46% compared to this time last year.
Things have improved slightly over the past few weeks, with mortgage applications up 2.2% in the week ending November 18th and up 2.7% the week before that. It’s the first bright spot in a while though, with demand dropping for nine out of the 10 previous weeks.
In early October demand fell by as much 14.2%.
So what exactly is going on with the mortgage market and what does it mean for house prices in the near term?
In a bid to bring down soaring inflation, the Fed has been playing hard ball with the central bank base rate. There have now been four consecutive rate hikes of 0.75 percentage points, marking the fastest rate hike experienced over the last 35 years.
Obviously this rapid change has flowed through to mortgages.
The Fed base rate is what all other debt in the economy is priced on. Everything from mortgages to credit cards to personal loans to student loans are influenced by the base rate, which is essentially the rate the banks themselves pay.
With such a rapid increase to the base rate, mortgage costs have gone sky high compared to this time last year. According to Freddie Mac, the current average rate for a 30 year fixed mortgage is 6.58%. This time last year that same average was just 3.10%.
So over the course of the past 12 months, the average mortgage interest rate has more than doubled. That’s a major dent to household budgets.
Putting into dollar terms, a $400,000 30-year mortgage at a rate of 6.58% would mean a monthly mortgage payment of $2,549. Change that interest rate to 3.10%, and the monthly payment figure comes down to $1,709.
That’s $840 more that a household would need to pay for the same property, at a time when prices are rising on everything else and there are layoffs occurring across many industries.
