(CNN) – Mortgage rates fell last week as fears grew that the US economy was sliding into recession.
According to Freddie Mac, the 30-year fixed-rate mortgage was an average of 5.30% in the week ending July 28, down from 5.54% the week before, and still significantly higher this week than at the time last year when it was 2.80%. .
Rates rose sharply at the start of the year, peaking at 5.81% in mid-June. But since then, concerns about inflation and the possibility of the US economy sliding into recession have made it more volatile.
Sam Khater, chief economist at Freddie Mac, said home buying continues to fall as buyers face higher rates, record home prices, increased recession risks and waning consumer confidence.
“It is clear that in the past two years, the combination of this pandemic, record low mortgage rates and the opportunity to work remotely has increased demand,” Khater said. “Now, as the market adjusts to a higher rate environment, we are looking at a period of contraction in selling activity until the market returns to normal.”
Mortgage rates fell as investors expected a 75 basis point interest rate hike by the Federal Reserve at its meeting on Wednesday. It was the second increase of this size in several months.
The Federal Reserve does not directly determine the interest rates that borrowers pay on mortgages. Instead, mortgage rates tend to track 10-year US Treasuries, which fell last week before the central bank meeting. But they are indirectly affected by the Fed’s efforts to control inflation.
The Fed also said on Wednesday that it may moderate the pace of interest rate hikes in the coming months.
“The statement was welcomed by financial markets as a signal that the Fed expects inflation to slow more clearly, which requires a less aggressive response,” said George Ratio, director of economic research at Realtor.com. “These moves are expected to maintain upward pressure on borrowing costs, including mortgage rates, going forward.”
Borrowing costs are growing
Ratio said consumers will feel the impact of the Fed’s increase in the coming months, with higher credit card interest rates and new auto loan rates in upcoming billing cycles.
“Borrowers with adjustable rate mortgages, or those hoping to sign up for one soon, can expect a rate hike,” he said.
The higher costs of home financing are already having an impact. Buyers are finding less expensive homes because inflation is eating up much of their income, and rising borrowing costs have eroded their purchasing power.
A year ago, a buyer who took a 20% discount on a home at an average price of $390,000 and financed the rest with a 30-year fixed mortgage at an average interest rate of 2.80% received a monthly mortgage payment of $1,282, according to numbers from Freddy. . Mac.
Today, a homeowner who buys a home at the same price at an average rate of 5.30% will pay $1,733 per month in principal and interest. That’s an extra $451 each month.
Demand among buyers is cooling
As a result of the rising cost of buying a home, the demand among buyers has slowed and many sellers are seeing their properties stay on the market for longer.
“For those who are motivated to sell, price cuts have become a strategy,” Ratio said. “We can expect the process of rebalancing in the housing markets to continue and accelerate, especially as we look to fall and winter.”
The Fed’s moves are designed to control inflation by reducing demand.
While home prices continued to rise to record levels in June, the number of sales fell.
Mortgage applications are also falling, falling last week for the fourth consecutive week, according to the Mortgage Bankers Association.
“Increased economic uncertainty and prevailing affordability challenges are preventing households from entering the market, resulting in lower purchasing activity approaching the lows last seen at the start of the pandemic,” said Joel Kahn, associate vice president of economic and industrial forecasting at the MBA. “. .