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Housing Market Struggles as Mortgage Rates Fluctuate

Housing Market Struggles as Mortgage Rates Fluctuate

Last week witnessed a dip in homebuyer demand as mortgage rates briefly surged past 7% for the first time since mid-December, before settling back below that threshold, as per a daily gauge of rates.

According to the Mortgage News Daily index, the average rate for a 30-year fixed mortgage shot up from 6.63% on Feb. 1 to a peak of 7.04% on Monday. However, by Thursday, it had moderated slightly to 6.95%. Meanwhile, another metric, Freddie Mac, reported a more modest increase, with the 30-year fixed mortgage climbing to 6.64% on Thursday from 6.63% the previous week.

The rise in rates coincided with signals from Federal Reserve officials indicating a pause in cutting its benchmark interest rate until they were confident about cooling inflation. This shift followed a robust jobs report, which, while positive for buyers, also raised concerns about inflation due to potential wage growth.

For buyers sensitive to rate changes, the volatility is concerning, impacting their affordability. Despite this, optimism persists among some potential borrowers who hope for softened rates later in the year.

Lisa Sturtevant, Bright MLS chief economist, remarked, “Homebuyers may be feeling like the lower rates they’ve been promised in 2024 are not materializing. It’s definitely true that rates have been bumping around to start the year.”

As rates edged higher last week, some prospective buyers delayed their purchase plans. The Mortgage Bankers Association’s survey showed a 1% decrease in purchasing applications for the week ending Feb. 2 on a seasonally adjusted basis. Overall, purchase activity remained 19% lower compared to the same period a year ago.

While the rise in rates is a concern, other factors, particularly inventory shortages, continue to stress homebuyer affordability. Sturtevant cautioned, “Homebuyers should expect mortgage rates to move lower as we head through 2024, but that does not necessarily mean it will be easier to buy a home.”

Realtor.com data showed a slight improvement in active listings compared to last year, but inventory levels remained significantly lower than pre-pandemic levels. Consequently, home prices continued to rise, albeit at a slower pace, with the median list price remaining steady at $409,500 in January.

Builders have been offering discounts, but these incentives may soon diminish. In January, 31% of builders reduced home prices, the lowest rate since August, according to the National Association of Home Builders. However, the average price reduction remained at 6%.

Despite the uncertainty surrounding rates, homebuyer confidence appears to be increasing. Fannie Mae’s survey found that a record-high 36% of respondents expected rates to decrease within the next year, indicating a more positive outlook.

However, while sentiment towards rates and job security improves, perceptions of homebuying conditions remain bleak. Only 17% of consumers considered January a good time to buy, reflecting ongoing concerns about affordability.

Doug Duncan, Fannie Mae’s chief economist, noted, “While home affordability may improve if actual mortgage rates continue moving downward, other parts of the affordability equation have yet to ease or improve for consumers.” Until housing supply increases significantly, affordability is likely to remain a major barrier to homeownership for many households.

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