Mortgage Rates Plunge As Inflation Shows Signs Of Cooling

Mortgage Rates Plunge As Inflation Shows Signs Of Cooling
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Mortgage rates have taken a nosedive this week following a better-than-expected monthly inflation reading. Nonetheless, elevated home prices, depressed buyer demand and low builder confidence indicate the housing market has a ways to go before it finds balance.

The average 30-year, fixed-rate mortgage plummeted to 6.61% for the week ending November 17, from 7.08% last week, according to Freddie Mac. Even after the whopping 47-basis-point drop (a basis point is one-hundredth of a percentage point) from a week ago, the typical rate is still more than double the 3.22% average from early January.

The 15-year, fixed-rate mortgage averaged 5.98% this week, down from 6.38% last week but up from 2.39% a year ago.

The average 5/1 adjustable-rate mortgage (ARM) was at 5.73%, down from 5.87% last week, according to the Mortgage Bankers Association (MBA). As borrowing costs have remained high, ARMs have been more attractive, since they have a lower initial rate than fixed-rate mortgages. But the rate on a 5/1 ARM can “adjust” higher—or lower—after the first five years.

ARM applications made up 10.6% of all mortgage requests during the week ending

November 11, down from 12% the week before, according to MBA. ARMs comprised just 3% of all mortgage applications in January 2022.

The rates above don’t include the fees called “points” or other costs associated with obtaining home loans.

Related: Compare Current Mortgage Rates

Mortgage Rates Forecast Into 2023

Mortgage rates have hit some extreme highs and lows this year, with 30-year, fixed-rate home loans dropping to an average 4.99% on August 4, then peaking at 20-year highs exceeding 7% in October and November.

Rising rates have been due, in part, to the Federal Reserve hiking its federal funds rate six times this year as it battles high inflation. The Fed has signaled it will continue to tighten monetary policy into early 2023, which will indirectly impact mortgage rates. Long-term mortgage rates are more directly tied to the yields on Treasury bonds, which react to the Fed’s actions and monetary policy.

The sharp drop in rates this week was enough to motivate some home shoppers. Following eight consecutive weeks of declines, mortgage loan application volume rose by 2.7% this week, with purchase applications fueling the upswing, according to the MBA.

However, experts are being careful not to jump to any positive conclusions from this latest drop in rates.

“While the decline in mortgage rates is welcome news, there is still a long road ahead for the housing market,” says Sam Khater, chief economist at Freddie Mac, in an emailed statement. “Inflation remains elevated, the Federal Reserve is likely to keep interest rates high and consumers will continue to feel the impact.”

Despite uncertainties surrounding the Fed’s actions and inflation, most housing experts predict mortgage rates will decline to an average of around 5% to 6% in 2023. But some have predicted rates will go higher.

Related: Mortgage Rates Forecast For 2022

Where the Housing Market is Headed Into 2023

Various indicators suggest the housing market, which saw record-high home prices earlier this year, is starting to cool. For instance, the median home sale price has fallen by over 8% since June, and year-over-year home price growth slowed to 3.2% in early November, according to Redfin data.

At the same time, a homebuyer today must earn over $107,000 to make the monthly payment on a typical home, according to another Redfin study. That’s up more than 45% from a year ago.

Indeed, affordability remains out of reach for many home shoppers. Shelter costs increased by 0.8% from September to October, according to the government’s latest consumer price index, a key barometer of inflation. This is the largest monthly climb since August 1990. The shelter index saw a year-over-year increase of 6.9% in October.

Persistently high inflation and mortgage rates continue to impact builders’ sentiment for the foreseeable future. The latest monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) sank 5 points, from 38 to 33, between October and November, reflecting an ongoing theme of deteriorating confidence in the housing market. This is the 11th consecutive drop since December, when the index score was 84.

The HMI index is on a scale of zero to 100 and gauges the strength of the single-family housing market. The survey includes roughly 900 U.S. homebuilders, and a score below 50 indicates a negative outlook for the industry.

“Higher interest rates have significantly weakened demand for new homes as buyer traffic is becoming increasingly scarce,” says NAHB Chairman Jerry Konter, a homebuilder and developer from Georgia, in a statement.

So what does this all mean for prospective home buyers? Should they jump into the game now or wait until sometime in 2023 in the hopes home prices decline further?

“We do not think home prices will go down,” says Andre Kocher, a Dallas-Fort Worth-based Keller Williams real estate agent, laying out how that could happen. “Our concern is early to mid-next year inflation is receding, interest rates fall and buyers come back in a big way, and we are right back where we were early this year: low inventory, too many buyers, multiple offers above list price.”

Related: Best Mortgage Lenders Of November 2022

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