The typical mortgage payment is now $200 cheaper than it was several weeks ago, and homebuyers with renewed purchasing power are coming back into the market

Source: Business Insider

Demand for homes drastically faded over the summer as higher borrowing costs weighed on wallets and dented buying power — but that could all soon change as mortgage rates continue to fall lower by the week.

Mortgage rates have fallen throughout December and are likely to continue their descent as inflation wanes and the Federal Reserve readjusts the size and quantity of its interest rate hikes. This week, the average rate on a 30-year fixed-rate mortgage fell to 6.27%, a Thursday report from Freddie Mac showed. And over the last six weeks, mortgage rates have declined more than three quarters of a point — marking the largest drop since 2008.

Lawrence Yun, the chief economist at the National Association of Realtors, said in a December housing report that “the market may be thawing,” as mortgage rates fall and “the average monthly mortgage payment is now almost $200 less than it was several weeks ago when interest rates reached their peak for this year.”

Melissa Cohn, the regional vice president of full-service lender William Raveis Mortgage, says the discount — and the prospect of even lower mortgage rates — has already reignited home buying interest from her clients.

“I would not say it is back to business like a year ago,” she told Insider of the latest shift in rates and buyer interest. “But I feel like I see more people getting ready and geared up for 2023, and getting excited by the fact that rates are lower.”

High interest rates presented a major challenge to buyers who were seeking the best terms on a home. And as rates rose over the summer, buyers flexed their power to back out of deals where they were locked into high interest rates and record high home prices. But the latest streak of rate drops are luring cautious buyers back in, even if just to explore their options, Cohn said.

“I have a client that reached out to me earlier this week who basically pulled out of the market because of where rates were, but we are now speaking and he’s back into ‘Let’s see what I can find right now,”’ she added.

Many lenders and Realtors are seeing an uptick in buyer demand. According to real estate brokerage Redfin, measures of early-stage homebuying demand are up by double digits since tanking at the end of October. The company’s Homebuyer Demand Index increased 10% in December and reports that mortgage-purchase applications are up 14% from the end of October.

“Slowing inflation and the hope of the Fed easing rate hikes in the new year are likely to bring mortgage rates down further and thereby improve homebuying demand,” Taylor Marr, the deputy chief economist at Redfin said in the housing report. “But don’t call it a comeback or even a recovery yet; demand is still way down from its peak.”

Home sales have yet to rebound to their 2020 and 2021 levels

US homebuyer demand is still a long way from the levels seen throughout the early stages of the pandemic. In November, sales of previously owned homes dipped for the tenth straight month to a seasonally adjusted annual rate of 4.09 million units — 35.4% below the year-ago rate, the National Association of Realtors said Wednesday. It also marks the slowest rate of sales since May 2020.

Economists surveyed by Bloomberg forecasted a smaller decline to a 4.2 million-unit pace. November’s reading highlights the negative impact higher mortgage rates have had on purchasing demand — and ultimately the entire housing ecosystem.

“In essence, the residential real estate market was frozen in November, resembling the sales activity seen during the COVID-19 economic lockdowns in 2020,” Yun said. “The principal factor was the rapid increase in mortgage rates, which hurt housing affordability and reduced incentives for homeowners to list their homes.”

Indeed, a combination of surging inflation and higher interest rates — the Federal Reserve raised rates by 75 basis points during its November meeting — sent mortgage interest rates soaring in November. During October and November, rates reached above 7% for the second time in more two decades for the most popular type of mortgage, a 30-year fixed-rate home loan. Not only did this lead to a pullback in buyer demand, it also pushed new residential construction, also known as housing starts, down 0.5% from the revised October estimate of 1.43 million units.

But as softer inflation encourages the Fed to move away from its aggressive interest rate hikes, it could lead to even lower mortgage rates in the new year — that could bring more buyers and homes back to the housing market.

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