The housing market is experiencing significant shifts as mortgage rates fluctuate and affordability challenges grow. Recently, the average rate on a 30-year mortgage dipped to 6.47%, marking the lowest it has been since mid-May of the previous year, down from 6.73% the week before.
This decline is welcome news for potential homebuyers and homeowners considering refinancing options. Sam Khater, the chief economist at Freddie Mac, noted, "The decline in mortgage rates does increase prospective homebuyers’ purchasing power and should begin to pique their interest in making a move."
Despite the drop, the average rate remains more than double what it was just three years ago, when rates were under 3%. The high rates have contributed to extending the nation’s housing slump, resulting in sales of previously occupied homes falling for four consecutive months.
The recent trend of decreasing rates follows expectations of lower inflation and changes in the labor market, raising hopes for potential cuts to the Federal Reserve's benchmark interest rate. Mortgage rates are typically influenced by the bond market, particularly the 10-year Treasury yield.
For many borrowers, especially those currently facing high housing prices and limited market inventory, affordability remains beyond reach. Lisa Sturtevant, chief economist at Bright MLS, explained, “Buyers are biding their time, waiting for rates to fall and for more inventory to come onto the market.”
Interestingly, the share of adjustable-rate mortgages (ARMs) is rising, driven by affordability constraints. While only 4% of mortgage originations were ARMs back in 2021, they now make up 15.5% of new mortgages as buyers seek affordable options.
The appeal of ARMs has resurfaced as homebuyers look for lower initial payments, which can provide some financial relief amid soaring home prices. Adjustable-rate loans, particularly 5/1 and 7/1 products, offer lower starting interest rates than fixed-rate loans.
Nonetheless, the surge of ARMs brings risks reminiscent of the 2008 housing crisis, where many buyers faced significant rate shocks. Unlike the lending practices of the mid-2000s, current regulations require borrowers to demonstrate their ability to handle potential increases associated with ARMs.
For those struggling with affordability, piggyback loans are emerging as another viable option. These loans involve taking out separate home equity loans or lines of credit to cover down payments or closing costs, allowing buyers to move forward even in high-cost markets.
With higher interest rates than primary mortgages, piggyback loans come with their own set of challenges. CoreLogic reports show more FHA purchase mortgages are being piggybacked than their conventional counterparts, indicating the struggles of first-time buyers to secure affordable housing.
The median property value of homes purchased via piggybacked loans has decreased significantly over the years, highlighting the affordability struggles of prospective buyers. While piggyback loans can facilitate entry to homeownership, they also put buyers at risk of becoming over-leveraged.
Even with potential rate cuts on the horizon, the performance of these highly leveraged loans remains uncertain. CoreLogic principal economist Yanling Mayer cautions about keeping a close eye on borrowers' long-term ability to manage these financial obligations.
The interplay between mortgage rates, economic indicators, and consumer behavior paints a complex picture. Borrowers find themselves negotiating the challenges of high housing costs against fluctuated loan rates, which could either hinder or help their financial standings.
Overall, the housing market remains unpredictable, with the necessity for adaptability by both lenders and borrowers. With various factors influencing mortgage trends, including inflation rates and Federal Reserve policies, only time will reveal the path forward for potential homebuyers and the broader market.
