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The national average interest rate on a 30-year, fixed-rate mortgage fell from 5.7 percent during the week ending 30 June to 5.3 percent by 7 July, according to the Federal Home Loan Mortgage Corp. (FHLMC).
It was the second consecutive week of lower rates and the largest one-week drop since 2008.
Mortgage rates tend to reflect the yield on U.S. 10-year treasury bonds. In June, the yield reached an 11-year high near 3.5 percent, but has since fallen below 3 percent due to investors’ expectation that the U.S. Federal Reserve will continue to raise interest rates and yields could be higher later.
The yield closed at 2.993 percent on 11 July.
As mortgage interest rates dropped last week, the number of mortgage applications fell by 5.4 percent, according to the Mortgage Bankers Association (MBA).
“Purchasing activity is hamstrung by ongoing affordability challenges and low inventory,” MBA vice-president Joel Kan said to the Financial Times. “Homeowners still have reduced incentive to apply for a refinance,” because rates have risen.
The average selling price of a U.S. home topped $400,000 in May and remains high because homes for sale are scarce.
However, the speed at which prices are increasing slowed in May, decelerating to the slowest pace since 2006 even though they still rose at a pace nearly twice the historical average.
“The housing market will continue to normalize if home price growth materially slows due to the combination of low affordability and an economic slowdown,” FHLMC chief economist Sam Khater told the FT.
TREND FORECAST: With inflation showing minor signs of cooling and consumers draining their savings, which we highlighted in “Americans: Spending More, Saving Less” (7 Jun 2022), the U.S. housing market will collapse should mortgages climb toward double digits.
Also, as we have forecast, even moderate rate increases will end the artificially boosted housing boom.
Indeed, in April and May, new home sales fell 19 percent, year over year, to their slowest pace since April 2020. Existing-home sales also are slackening as we noted in “Pace of April Existing Home Sales Slowest in Two Years” (24 May 2022) and other articles.
The hardest hit will be first-time home buyers who made up just 27 percent of all home sales in May, down from 31 percent a year earlier and dropping to the 13-year low reached during the Great Recession.
Minus a wild card event, we forecast a drop in home prices, but we do not foresee a housing market crash. Unlike the Panic of ’08, this time, many homes were paid for with cash. Also, a larger proportion of homes this time have been bought by high-earning households that could make large cash down payments.
Therefore, there will be no subprime fiasco that artificially drove up home prices as occurred during the Great Recession, when houses were knowingly sold to people who could not afford to own them.