Mortgage rates approach 5%, a new blow for the housing market

According to lenders and real estate agents, even at present, all buyers, with the exception of the most qualified, pay large down payments are subject to 5% loan rates.

Rates have risen slightly in recent months, but "last week we saw an explosion in mortgage rates," said Rodney Anderson, a mortgage lender from the Dallas area.

Rising borrowing costs can have a direct impact on household income. For a home with a $ 250,000 mortgage, the 5% rates add about $ 150 to the monthly payments compared to the 4% rate that borrowers could have had less than a year ago, according to

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an information site on online loans. This excludes taxes and insurance.

Rising mortgage rates also slowed the real estate market more than expected. This is a potentially worrying sign for the entire economy, as housing is often an indicator of how rising interest rates could affect growth as a whole.

Many buyers who have trouble finding affordable housing because of high prices are more sensitive to rising rates than before.

Existing home sales decreased in August compared with the previous year, the sixth consecutive month of decline. Many potential buyers stayed out of the shopping season due to high housing prices, the historic shortage of homes to buy and a tax bill that reduced some incentives for homeownership. the property. Higher mortgage rates are likely to worsen their hesitations.

"With escalating prices, borrowers may be out of breath," said Sam Khater, chief economist at Freddie Mac.

Formerly hot markets are showing signs of slowing. Bill Nelson, president of Your Home Free, a Dallas-based real estate broker, said that in the neighborhoods where he works, the number of houses falling in price is more than double the number of contracts.

Brad and Virginia Reitinger closed a new home in Dallas two weeks ago and have opted for a variable rate mortgage in order to obtain a rate of 4%. With a 30-year fixed rate loan, they would have had to pay between 4.5% and 5%, said Reitinger.

He added that the prospect of a rate hike was prompting them to act quickly for the purchase of the new home. And if they had opted for a fixed rate mortgage, their monthly payment would have been higher by a few hundred dollars. "When you use numbers, it makes a big difference," he said.

Adjustable rate mortgages, which reset to market rates after a number of years, generally offer lower rates than fixed rate mortgages at the beginning of their term. Some lenders say they have seen an increase in the number of customer inquiries about the product as rates increase. However, they account for a relatively small share of the mortgage market: they accounted for about 12% of mortgages initiated in the second quarter, according to the Inside Mortgage Finance Industry Research Group.

Rising rates could have profound consequences for the mortgage industry. Some lenders, especially non-bank companies that do not have other business sectors, could engage more risky customers to maintain the volume of their loans or be forced to sell themselves. Many US mortgage lenders, including some of the biggest players, did not exist ten years ago and only experience a low interest rate environment, and many young buyers do not remember a time when rates were higher.

Long-term mortgage rates have now risen by almost one percentage point, up from 3.95% at the beginning of the year.

"We have people who have been getting ready early and caring for it – that's what I preached," said Rick Bechtel, Head of US Mortgage Banking at TD Bank. "And they are the ones who suffer the most."

A series of recent positive economic news contributed to the rise in the 10-year Treasury note, to which mortgage rates are closely linked, to a seven-year high last week. The Federal Reserve, which raised its key rate three times this year, should do it again in December.

And higher rates will likely eliminate any lingering possibility of a refinancing boom, which would have saved the mortgage sector in the years following the 2008 financial crisis. If rates reach 5%, the homeowners group that would qualify for refinancing and would benefit would be reduced to 1.55 million, according to a company specializing in mortgage data and technology.

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This would be a drop of about 64% since the beginning of the year and the smallest pool since 2008.

The highest rates will be the most difficult for first-time buyers, who tend to make smaller down payments than older buyers who have accumulated holdings in their previous homes, and middle-income buyers less the means to afford the extra costs. Mr. Khater said that about 45% of the loans that Freddie Mac supported were intended for first-time homebuyers, up from about 30% normally, which also means that rising rates could have an impact. even bigger than usual on the market.

The highest rates also shock younger buyers because they no longer remember when they were above 18% in the early 1980s or, more recently, in the first decade of the 2000s, when rates fluctuated between 5% and 7%. .

"There is almost a generation that has a habit of seeing rates of 3% or 4%, but now 5%," said Vishal Garg, founder and CEO of Better Mortgage.

Write to Laura Kusisto at [email protected] and Christina Rexrode at [email protected]