Mortgage rates are approaching 8% with no relief in sight

Mortgage rates rose again last week, approaching 8%, convincing many homebuyers to abandon the market for now.

The average interest rate on a 30-year mortgage jumped to 7.79% from 7.63% the previous week, according to a new report. Freddie Mac Thursday. The average borrowing rate has remained above 7% for 11 weeks in a row and has risen eight weeks in a row.

To mitigate the effects of rising interest rates, homebuyers still in the market gravitate toward incentives from homebuilders or take out adjustable-rate mortgages, or ARMs. But these alternatives may be tested as interest rates are expected to rise.

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“Although higher mortgage rates and still-high prices are weighing on home shoppers, recent new home sales data show that buyers are finding a way to navigate the difficult environment,” said Hannah Jones, senior economic research analyst at . But “the target of 8% mortgage interest rate increases, like 5% Treasury yields, underscores the financial headwinds facing borrowers in today’s market.”

For example, home mortgage application volume fell 2% weekly on a seasonally adjusted basis last week. Mortgage Bankers Association (MBA) mentioned. The level is 22% lower than last year.

“Mortgage activity continued to stall, with applications falling to the slowest weekly pace since 1995,” said Joel Kahn, MBA vice president and deputy chief economist.

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More buyers have turned to ARMs, which come with a lower initial price. The share of ARM applications reached 9.5% of the total applications, the highest level since November 2022.

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The MBA data showed this The average rate for a 5/1 ARM was 6.99%. This mortgage offers a fixed interest rate for the first five years of the loan, then adjusts higher or lower each year thereafter, based on a predetermined interest rate index.

Other buyers are considering the new home market, instead, as builders offer a discount on interest rates on mortgages originated through sister lending companies. This helped boost new home sales.

For example, PulteGroup (PHM) offers a permanent buyer’s mortgage rate reduction of up to 5.75%, which is well below the prevailing market rate. Between 80% and 85% of buyers in the third quarter chose incentives, PulteGroup CEO Ryan Marshall said this week on the company’s latest earnings call.

Homebuilder Taylor Morrison has had similar success with these franchises, reporting results that exceed expectations.

“Over the past few quarters, we have expanded our incentive programs by purchasing a forward commitment at below market interest rates,” Cheryl Palmer, Taylor Morrison’s chairman, said during the company’s latest earnings call this week. “These rates can be used on select homes with quick move-in dates, as well as on to-be-built homes when combined with an extended rate lock of up to one year, providing permanent interest rate security.”

Builders also benefit from a tight supply of existing homes, another result of high mortgage rates. Homeowners are not interested in selling their home because they will be trading in a low rate on their existing mortgage for a much higher rate to finance a higher purchase.

At the end of September, the number of properties for sale was at its lowest level during the month since 1999, NAR reported last week. The inventory of single-family homes was at its lowest level since 1982.

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Prospective homebuyers leave a property for sale during an open house in a neighborhood in Clarksburg, Maryland, on September 3. (Photo by Roberto Schmidt/AFP via Getty Images)

The next direction for housing activity depends on what happens with mortgage rates.

The yield on the 10-year Treasury note – which is tracked by fixed mortgage interest rates – exceeded 5% this week for the first time in 16 years. Concerns about the economy, geopolitical concerns, and the Federal Reserve’s insistence that its benchmark interest rate will remain higher for longer have all supported the 10-year Treasury yield.

Read more: Mortgage rates at 20-year high: Is 2023 a good time to buy a home?

“There are a lot of moving pieces right now due to instability in the markets, and there’s no telling where [rates] “We’re going to go,” Nathaniel Pittman, a mortgage professional and president of the Florida Association of Mortgage Professionals, told Yahoo Finance before the mortgage rates were released Thursday.

“I think we’re going to be in a higher rate environment for a while,” he said.

Rebecca Chen is a reporter at Yahoo Finance and previously served as an investment tax certified public accountant (CPA).

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