Residential complex in Sacramento. Mortgage applications have fallen to their lowest level since 2018. Credit … Andri Tambunan for The New York Times
Mortgage rates have risen by nearly two percentage points since the beginning of the year – the fastest rate in nearly four decades – making it even more expensive for prospective home buyers in an already overheated market.
Whether these interest rates rise further may depend to a large extent on the effectiveness of the Federal Reserve’s attempts to quickly curb inflation.
The Fed raised its key interest rate by half a percentage point on Wednesday as inflation, driven largely by jumps in energy and food prices, continues to rise. This was the largest increase in Fed interest rates in more than 20 years.
Because the base interest rate, known as the federal interest rate, directly and indirectly affects the price of many loans, the increase is intended to increase borrowing costs, slow demand and limit price increases.
Mortgage interest rates are not directly related to the interest rate of federal funds. They tend to track the yield on 10-year treasury bonds, which is influenced by a variety of factors, including inflation expectations.
“Inflation is the hub of the wheel,” said Greg McBride, chief financial analyst at Bankrate.com. The risk is that interest rates will continue to rise, “unless we get some solid evidence that inflation has peaked and is beginning to recede,” he added.
Although still low by historical standards, the rate on a 30-year fixed-rate mortgage averaged 5.10% for the week ended April 28, according to Freddie Mac. This is their highest point in 12 years and more than 2.98 percent a year ago. The average is 3.11% at the end of 2021.
Higher mortgage rates, combined with a spike in house prices – the average existing home was about 15 per cent more expensive in March than a year earlier – have eaten away at what potential home buyers can afford.
This also reduced demand: applications fell to their lowest levels since 2018, according to the Association of Mortgage Bankers.
“Future homebuyers withdrew this spring as they continue to face limited home sales opportunities, along with higher costs of rising interest rates and mortgage prices,” said Joel Kahn, the group’s associate vice president, last week. by economic and industrial forecasts.
With an initial installment of 10 percent on the average home, the typical monthly mortgage is now $ 1,834 – 49 percent more than $ 1,235 a year ago, taking into account both higher prices and interest rates. And that doesn’t include other things that aren’t negotiated, such as property taxes, homeowner’s insurance, and mortgage insurance, which is often required for down payments of less than 20 percent.
These costs add up over time. In a recent study, Jacob Channel, a senior economist and analyst at LendingTree, used data from his online market to find that rising interest rates since the beginning of the year could cost home buyers an additional $ 93,000 a lifetime on a 30-year mortgage.
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