Homeownership just got 5% cheaper as mortgage rates fall off a cliff

U.S. mortgage rates fell sharply and for the second straight week as monetary policies meant to slow the economy take hold of the housing market.

The rate on the popular 30-year fixed mortgage hasn’t fallen this much since December 2008, a new report shows.

Though rates have been rising for most of this year, the recent dips provide a sliver of hope for buyers.

Purchasing a home is now about 5% more affordable than it was a week ago, says Nadia Evangelou, senior economist for the National Association of Realtors.

That translates to savings of about $100 on a typical monthly mortgage payment.

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30-year fixed-rate mortgages

The average rate on a 30-year fixed mortgage fell to 5.30% this week, down from 5.70% a week ago, mortgage finance giant Freddie Mac reported on Thursday. A year ago, the 30-year rate was averaging 2.90%.

“Over the last two weeks, the 30-year fixed-rate mortgage dropped by half a percent, as concerns about a potential recession continue to rise,” says Sam Khater, Freddie Mac’s chief economist.

The Federal Reserve, which is trying to lower inflation by cooling the economy, hiked its benchmark interest rate three-quarters of a percentage point in June.

The central bank is likely to make another hike of the same magnitude when it meets again later this month, according to the minutes from last month’s Fed meeting.

15-year fixed-rate mortgages

The 15-year fixed-rate mortgage averaged 4.45% this week, down from 4.83% last week, Freddie Mac says. Last year at this time, the 15-year rate averaged 2.20%.

Higher borrowing costs have been tempering demand for homes, and the market is recalibrating.

“Home price growth has started to soften and price cuts are becoming more common, as sellers are finally being challenged and begin to reconsider their expectations,” Matthew Speakman, senior economist with Zillow, said in a recent interview.

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Indeed, homeowners are being forced to shift their mindsets.

While many new listings are still selling within days, multiple-offer situations are fewer and farther between, says Corey Burr, a Washington D.C. real estate agent.

A seller should be prepared to make adjustments if a property doesn’t go under contract within two weeks of being listed.

“In these cases, we are seeing more broker commission incentives, more seller offers to help pay for buyer closing costs and outright list price reductions,” says Burr, senior vice president at TTR Sotheby’s International Realty.

5-year adjustable-rate mortgages

The five-year adjustable-rate mortgage (ARM) averaged 4.19% this week, down from 4.50% last week. The 5-year ARM was averaging 2.52% a year ago.

ARMs, which fluctuate depending on the prime rate, start off with lower interest costs. They can surge, however, once the initial fixed-rate period expires.

Despite the recent dips in rates, fewer Americans are taking on new mortgages.

Applications fell 5.4% according the Mortgage Brokers Association’s (MBA) latest weekly survey.

“Rates are still significantly higher than they were a year ago, which is why applications for home purchases and refinances remain depressed,” says Joel Kan, the MBA’s associate vice president of economic and industry forecasting.

When will home prices start to fall?

The median price of a home hit a record $450,000 in June, 17% higher than last year, according to Realtor.com.

That’s leaving little room for buyers on budgets.

While prices are expected to soften, they have yet to make any appreciable moves, according to researchers at Florida Atlantic University (FAU) and Florida International University.

Average prices still are rising in nearly all of the 100 largest housing markets, they found. Evidence, however, suggests the market may be nearing its peak.

“There are plenty of reports that mortgage applications and home showings are falling as interest rates rise,” Ken Johnson, an economist in FAU’s College of Business, says in a new report.

“We expect prices eventually will level off as well, particularly if a recession occurs and lending rates remain high.”

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