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Mortgage rates tick higher again as recession fears loom

<i>David Paul Morris/Bloomberg/Getty Images</i><br/>A
Bloomberg via Getty Images
David Paul Morris/Bloomberg/Getty Images
A "For Sale" sign is seen outside a house in Hercules

By Anna Bahney, CNN Business

Mortgage rates ticked higher for the second week in a row as more economic indicators flashed warning signs of an impending recession.

The 30-year fixed-rate mortgage averaged 5.54% in the week ending July 21, up from 5.51% the week before, according to Freddie Mac. That is significantly higher than this time last year when it was 2.78%.

Rates have risen sharply since January, hitting a 2022 high of 5.81% in mid-June. But since then, economic concerns have made rates more volatile. Rates dropped the first week in July, notching the biggest one-week dip since 2008.

“The housing market remains sluggish as mortgage rates inch up for a second consecutive week,” said Sam Khater, Freddie Mac’s chief economist. “Consumer concerns about rising rates, inflation and a potential recession are manifesting in softening demand. As a result of these factors, we expect house price appreciation to moderate noticeably.”

Higher rates have put a dent in mortgage demand, as loan applications dropped to the lowest level in 22 years, according to the Mortgage Bankers Association.

“The weakening economic outlook, high inflation, and persistent affordability challenges are impacting buyer demand,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting.

The decline in applications aligns with reports earlier this week showing homebuilding activity is slowing due to reduced buyer traffic and rising prices for supplies. In addition, another report found existing home sales, fell for the the fifth straight month as buyers paused their home search.

All eyes on the Fed

The Federal Reserve’s meeting next week is also weighing on mortgage rates. Markets and economists anticipate another 75-basis-point hike to curb inflation. The question is whether a hike that size will be enough, or if the Fed will push for a 100-basis-point increase.

The Federal Reserve does not set the interest rates borrowers pay on mortgages directly. Rates tend to track 10-year US Treasury bonds. But mortgage rates are indirectly impacted by the Fed’s actions on inflation. As investors see or anticipate rate hikes, they often sell government bonds, which sends yields higher and with it, mortgage rates.

As a result, the spread between the 2-year and 10-year Treasuries moved even deeper into negative territory this week.

“This yield-curve inversion points toward growing investor concern that the Federal Reserve’s rate setting is not likely to tamp down fast-running inflation,” said George Ratiu, Realtor.com’s manager of economic research. “Yield curve inversions have preceded most economic recessions of the past half century.”

Buyers hitting ‘affordability ceiling’

For prospective buyers, steep price gains and higher mortgage rates have created an affordability ceiling, said Ratiu.

“Many Americans are finding they no longer have enough money to purchase a home that meets their needs,” he said.

A year ago, a buyer who put 20% down on a median priced $390,000 home and financed the rest with a 30-year, fixed-rate mortgage at an average rate of 2.78% had a monthly mortgage payment of $1,279, according to calculations from Freddie Mac.

Today, a homeowner buying the same priced house with an average rate of 5.54% would pay $1,779 a month in principal and interest. That’s $500 more each month.

The increase in finance costs mean fewer homes are available to entry-level buyers. A household earning $75,000 per year can only afford 23% of active listings on Realtor.com, according to the home search site.

Meanwhile rents continue to climb, with the median rent reaching a new high of $1,878. Even with the high rents, it is still less expensive to rent than buy in a majority of US cities.

“People who cannot afford to buy a home are not finding much reprieve in the rental market,” said Ratiu. “Looking to the next few months, it’s becoming increasingly clear that real estate markets are headed for a correction.”

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