For most people, part of growing up is owning a home. Many save up for years to afford a place they can call their own and that their family can enjoy. It is part of the American dream. But these days, many are finding this dream growing more and more distant by the hour. As interest rates rise and inflation remains high, people are putting their home-owner dreams on the backburner.
The Mortgage Bankers Association (MBA) revealed on March 1 that demand for both home purchases and refinancing have fallen through as interest rates keep climbing.
The purchase index, which measures mortgage applications for the purchase of a home, fell by 5.6% in the last week of February.
Mortgage Rates Go Up Disheartening Prospective Homebuyers
The purchase index is at a 28-year low for the second week in a row, according to the MBA. Prospective homebuyers have had to contend with high inflation, which tightened budgets, and rising mortgage rates. Squeezed between the two, potential homeowners have been left with no option but to postpone their purchase plans.
Layoffs and an unstable economy have added pressure on households, and people do not want to make long-lasting monetary decisions when the future appears bleak. Although the Fed earlier admitted that inflation is easing, it has not gone down enough for the common man to breathe easy.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) increased to 6.71% from 6.62%, with points rising to 0.77 from 0.75 for loans with a 20% down payment. That is the highest rate since November of last year.
Just in February, mortgage rates have moved up almost 50 basis points whereas for the same month last year it hovered around 5%.
Mortgage applications started slipping towards the end of January. At the start of February, the MBA admitted to this fact. “Overall application activity declined last week despite lower rates, which is an indication of the still volatile time of the year for housing activity,” said Joel Kan, vice president and deputy chief economist at the MBA.
“Refinance applications account for less than a third of all applications and remained more than 70% behind last year’s pace, as a majority of homeowners are already locked into lower rates,” observed Kan.
At the time, the agency was hopeful that lower rates will ignite demand and moderating home-price growth will be beneficial to the potential buyers.
Rising Inflation and Layoffs Crush the American Dream
Last month, JP Morgan chief Jamie Dimon declared that although inflation seems to be steady the Fed will keep interest rates high to control inflation.
The Lending Tree found that currently Americans owe $11.92 trillion on their mortgages, and mortgage debt accounts for almost three-fourths of consumer debt in the country.
Overall, mortgage demand and rates are affected by the strength of the economy. In a personal capacity, people need enough money set aside for discretionary spending, good credit scores, and steady income to make decisions about buying homes. When inflation and interest rates appear to be in competition, the average consumers suffer from its effects.
Throughout 2022, the Federal Reserve struggled to keep inflation in check. But with heightened geopolitical tensions and supply chain snarls disrupting profit forecasts, people have had to shell out more than expected for their food, rent, and gas. All this has caused a dent in their financial planning, forcing them to reconsider taking out mortgages.
According to FRED Economic Data, the average price for a house in the US was $535,800 in December 2022, up 7.7% from 2021.
After a brief respite in early January, it appears that mortgage rates have climbed higher. Low mortgage demand is to be expected as homeowners must take their financial health into account, while they wait for inflation and economic activity to stabilize.
