Mortgage rates jumped again this week, giving no relief to the price-weary homebuyers still in the market.
The rate on the 30-year fixed mortgage increased to 5.66% from 5.55% the week prior, according to Freddie Mac, and is up more than a half-point from two weeks ago. While lower than the 5.81% registered in June, the rate remains over 2 percentage points higher than the start of the year.
Higher borrowing costs have left cash-strapped homebuyers at a divide. Some folks have opted to put off their purchase plans and wait for better market conditions, while those who remain are taking advantage of the dip in competition to strike a bargain with sellers.
“The increase in mortgage rates is coming at a particularly vulnerable time for the housing market as sellers are recalibrating their pricing due to lower demand, likely resulting in continued price growth deceleration,” Sam Khater, Freddie Mac’s chief economist said in a news release.
Buyers haven’t been this jittery about the housing market since the early 2000s.
Demand for mortgages hit a multi-decade low in August, according to the Mortgage Bankers Association’s survey for the week ending August 26, as refinance and purchase activity continued to shrink. Purchase activity has declined in eight of the last nine weeks, down 23% from the same week a year earlier.
While higher borrowing costs are to blame for the lull in activity, rising inventory and a slowdown in home price growth may bring some buyers back into the market.
Signs that first-time buyers are returning are emerging. Applications for government mortgages – such as the Federal Housing Administration, Department of Veterans Affairs, and Department of Agriculture, all popular choices among first-time buyers, have registered an uptick in recent weeks, the MBA reported.
“There is definitely more activity in government loans this year relative to last year or the year previous,” Robert Heck, vice president of mortgage at Morty, an online marketplace, told Yahoo Money. “It's not huge, but we’re definitely seeing that pickup as an option.”
As buyer demand has slowed, so have home prices.
The median home price fell to $435,000 in August, according to Realtor.com, down from $449,000 last month and June’s record high of $450,000.
“We're starting to see home price appreciation or the acceleration drop, or it's at least decelerating,” Heck said
Still, home prices remain 36.9% higher than in August 2019 and pose a challenge for first-time buyers. At last week’s rate of 5.55%, the median monthly payment on the typical home was $2,050, about 61% more than last year.
“The combination of higher interest rates and higher home prices has really cratered affordability,” Keith Gumbinger, vice president of HSH.com, told Yahoo Money. “We're talking about incomes needed to buy homes that are 30% or 40% higher right now than they were at the same time last year. And yes, folks are getting raises and whatnot, but nobody's wages are rising 30 or 40% in a year.”
Home sellers adjust price expectations
As more buyers hesitate, sellers have become more open to negotiations.
Nearly 1 in 5 homes on the market had their listing price reduced in August, according to Realtor.com. Another 92% of sellers accepted buyer-friendly terms last month, agreeing to contingencies such as home inspections and appraisals, with all sellers surveyed saying they agreed to make some repairs when asked.
The newfound bargaining power shows in the numbers: At least 67% of buyers said they asked for repairs in August, versus 31% that asked six to 12 months ago.
“We have a fairly abrupt change in the market this year in terms of both infrastructure, certainly home prices, and the affordability equation changed appreciably from where we began the year to where we are right now,” Gumbinger said. “We're kind of in a period of adjustment right now. I don't know that necessarily conditions are going to remain this way forever, [but] right now we are slowing down.”
Editor's note: An earlier version of this story erroneously stated the average rate for the 20-year fixed mortgage. The rate is for the 30-year fixed mortgage.
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.