Mortgage rates top 6%, causing a decline in buying activity

For nearly two years, mortgage rates have been dropping to their historic lows, motivating millions of buyers to jump into the real estate market. But the recent increase in borrowing costs shows that the era of record-low interest rates is over. At least for now. 

This week, the average interest rate for a 30-year loan surpassed 6 percent. Just a week ago, the rate was 5.55 percent. The sharp increase in borrowing costs leads to frustration among buyers. Fewer people apply for a home loan, and purchase activity is declining.

At the beginning of June, mortgage and refinance applications dropped to their lowest level in 22 years, according to the Mortgage Bankers Association. Those who decide to get a home loan now apply for a smaller amount. 

“... After increasing for 15 consecutive months, the average loan size fell slightly from April’s survey high to $430,855, which is a potential indication that cooling demand may be starting to moderate price growth,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. 

Currently, mortgage rates are increasing at a fast pace. But they are still far from surpassing previous records. For example, interest rates reached their highest point in the 1980s, when the annual average was 18 percent.

Between April 1971 and April 2022, the mortgage rate for a 30-year fixed loan averaged 7.78 percent, according to the chart created by the Mortgage Reports. Interest rates are growing fast, but they are still relatively affordable compared to what we have seen in the past.

The growing borrowing costs pushed some people to return to the rental market. However, in some cases, buying can be more affordable than renting. Last month, the median rent in Manhattan set a new record, reaching $4,000 a month. A similar market dynamic is also seen in Brooklyn and northwest Queens. 

“The rental market is very extreme. I have had several buyers who are new, who are choosing to buy because of the rent increases,” Emily Margolin, a broker at Douglas Elliman, told The Real Deal.

Resources:

“Mortgage rates flirt with 6%, but silver linings exist,” by  Cailley LaPara (The Real Deal, 2022)

“30-year mortgage rate surges to 6.28%, up from 5.5% just a week ago,” by Diana Olick (CNBC, 2022)

“Mortgage demand falls to the lowest level in 22 years amid rising rates and slowing home sales,” by Diana Olick (CNBC, 2022)

“Mortgage Applications Decrease in Latest MBA Weekly Survey,” by Adam DeSanctis (Mortgage Bankers Association, 2022)

“A look at mortgage rate history,” by Peter Miller (The Mortgage Reports, 2022)