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Rate shifts continue to impact market

September 26, 2018

The housing market has changed a lot in the past several months as demand among consumers remained high. Prices continued to rise at paces well above historical norms, but the limited supply seemed to constrain stronger growth in this area. Meanwhile, the improving economy led to more growth for mortgage rates, which further drove down affordability for many would-be buyers.

"The average rate for top borrowers was

up very slightly from July."

In fact, the average mortgage rate offered to even the most qualified applicants - those in the top 5 percent of credit scores - was 4.32 percent in August, according to new data from LendingTree. That was up very slightly from the 4.31 percent seen in July, but that number was also up considerably on an annual basis.

Meanwhile, borrowers with scores north of 760 - in the top 35 percent of applicants - were offered average rates of 4.84 percent, in comparison with 5.13 percent for people with scores between 680 and 719, the data showed. The difference between those two rates would lead to an additional $15,000 in borrowing costs over the life of a 30-year mortgage, highlighting just how important it is for borrowers to come into the application process with the highest possible rating.

Likely due in part because of rising prices and other financial pressures, the average size of a down payment slipped almost 2 percent, to $56,933, in August, the report said. In actual cash value, that represented a decline of about $1,000.

What's the impact?
As rates rose throughout August, that financial reality for many would-be buyers seemed to take its toll on the number of home loan applications being filed nationwide, according to the latest Weekly Mortgage Applications Survey from the Mortgage Bankers Association. In the week ending Aug. 24, the total number of applications for both purchases and refinances slipped 1.7 percent on a seasonally adjusted basis from the previous week, thanks to a 1 percent dip among those looking to buy, and a 3 percent drop for current owners attempting to refinance.

However, because of the significant demand for homebuying over the course of 2018, the number of purchase applications seen in that seven-day period was still up 3 percent year over year, the report said. At the same time, the share of the mortgage market taken up by refinances was unchanged at 38.7 percent.

Interestingly, all those declines came despite the fact that mortgage rates actually declined slightly in that single week, the data showed. For instance, the average rate on a 30-year FRM with a conforming loan balance slipped to 4.78 percent from the previous 4.81 percent, the report said. Those for 15-year FRMs - which are most often used in refinances - slipped to 4.24 percent from the earlier 4.25 percent.

The bigger picture
More recently, mortgage rates continued their long, slow ascent seen over the course of 2018, according to Freddie Mac's weekly Primary Mortgage Market Survey. While small fluctuations from one week - or even month - to the next might not be having a huge impact on consumer sentiment about mortgage affordability, it's important to consider how much rates have spiked on an annual basis.

For instance, Freddie's latest findings showed that rates for 30-year FRMs in the week ending Aug. 30 came in at 4.52 percent, which marked a sizable increase from the 3.82 percent in the same seven-day period in 2017. Even more appreciable increases - both proportionally and in terms of raw percentage-point increases - came for rates on 15-year FRMs, which have surged from 3.12 percent to 3.97 percent.

"Flattening rates could be a good sign for consumers."

However, there is optimism in the housing sector that rates flattening out over the course of the summer could be a sign for consumers that it's wise to get into the market sooner than later, the report said. After all, as long as the economy continues to improve, rates are likely to follow suit, so a summer without much movement could prompt some to get into the market soon and lock in a better-than-expected deal.

"The 30-year fixed-rate mortgage barely inched up this week, continuing the summer trend of essentially being flat," said Sam Khater, Freddie Mac's chief economist. "While sales and price growth have softened these last few months, this leveling of rates may be helping more buyers reach the market. Purchase mortgage applications this week were once again modestly above year ago levels. Given the strength of the economy, it is possible for home sales to pick up even more before year's end. The key factor will be if affordably-priced inventory increases enough to continue this recent trend of cooling price appreciation."

Other impediments?
It's worth noting that many current renters who previously might have been considering getting into the housing market may now be less eager to do so because of the dynamics around home price growth, according to new data from Thanks to rising rates and prices, among other things, the cost of owning a home has grown 14 percent in the past year, compared with just a 4 percent increase in average monthly rental costs over the same period.

And while that's a national statistic that certainly doesn't encompass all markets, the number of major metro areas where it's cheaper to buy than rent slipped from 44 percent last year to just 35 percent in 2018, the report said. Moreover, 75 percent of the nation's largest counties where the cost of renting has been overtaken by the cost of homeownership were located in the previously dirt-cheap Southern U.S. and Midwest.

Consequently, only about 2 in 5 Americans now live in a place where it's cheaper to buy than continue renting, Chief Economist Danielle Hale noted. The national median monthly cost to own a home came in at $1,647 in July, compared with just $1,267 for renting. That's an increase of 30 percent median renters must account for if they're going to buy, even barring other considerations like having to build a sizable down payment.

Because of all these issues, consumers have to think carefully about how they enter the housing market, and make sure their down payments and credit ratings are as strong as possible before taking the leap. Working with real estate and financial professionals can help them unlock the best possible deals based on their own unique needs.




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