Fed Pauses Rate Hike, Mortgage Rates Follow Suit

Freddie Mac has reported in its latest Primary Mortgage Market Survey (PMMS), that the 30-year fixed-rate mortgage (FRM) averaged 7.19% for the week ending September 21, 2023, up just one basis point from last week when the FRM averaged 7.18%. A year ago at this time, the 30-year FRM averaged nearly a full percentage point lower at 6.29%.

This marks the sixth straight week that the 30-year FRM sits above the 7% mark, as just yesterday at the Federal Open Market Committee (FOMC) meeting, the Fed decided to hold the central bank’s nominal interest rate at 5.25%-5.50%.

Also this week, the 15-year FRM averaged 6.54%, up from last week when it averaged 6.51%. A year ago at this time, the 15-year FRM averaged 5.44%.

“Mortgage rates continue to linger above 7% as the Federal Reserve paused their interest rate hikes,” said Sam Khater, Freddie Mac’s Chief Economist. “Given these high rates, housing demand is cooling off and now homebuilders are feeling the effect. Builder sentiment declined for the first time in several months and construction levels have dipped to a three-year low, which could have an impact on the already low housing supply.”

As Khater notes, higher rates have led to a decline in builder confidence, as for the second consecutive month, the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) fell five points to 45, following a six-point drop in August.

“The two-month decline in builder sentiment coincides with when mortgage rates jumped above 7% and significantly eroded buyer purchasing power,” said NAHB Chairman Alicia Huey. “And on the supply-side front, builders continue to grapple with shortages of construction workers, buildable lots and distribution transformers, which is further adding to housing affordability woes. Insurance cost and availability is also a growing concern for the housing sector.”

Despite the slight week-over-week rise in mortgage rates, the Mortgage Bankers Association (MBA) reports that interest in conventional and FHA applications pushed overall mortgage application volume 5.4% upward week-over-week.

“Despite an increase in mortgage rates, applications for both home purchases and refinances rose last week,” said MBA President and CEO Bob Broeksmit. “The strong labor market continues to be a positive for the housing market, but tight inventory and higher rates and home prices continue to hold back many prospective buyers. With few homes on the market, the average loan size for a purchase application increased to $416,800–the highest in nearly two months.”

And as the fall buying season gets underway, Jiayi Xu, Economist at Realtor.com, feels the next few weeks will be pivotal to how the remainder of 2023’s market will play out.

“With mortgage rates holding steady at over 7%, many homeowners are still hesitant to put their homes up for sale,” added Xu. “Although the current housing market presents significant challenges, the fall typically ushers in more favorable buying conditions compared to the rest of the year. For those looking to purchase a home in this tough year, the first week of October will emerge as the best time to make a move. Historical data suggests that during this particular week, home prices tend to dip below their peak levels, competition subsides, and the housing inventory expands compared to the busy summer months. However, prospective first-time homebuyers who lack home equity as leverage may still face considerable hurdles in attaining homeownership. Fortunately, the decreasing trend in rental prices offers some respite by alleviating the sense of urgency. The cooling rents combined with surging buy-costs have made buying a starter home a much less affordable option than renting one in almost all largest U.S. metros. As a result, we expect more households will remain in the rental market for longer and thus, have more time to save for their future homes."