(CNN) — Mortgage rates fell last week as fears mount that the US economy is slipping into recession.
The 30-year fixed-rate mortgage was 5.30% on average the week ending July 28, down from 5.54% the previous week, according to Freddie Mac. That is still significantly higher than this time last year when it was 2.80%.
Rates rose sharply at the beginning of the year, peaking at 5.81% in mid-June. But since then, concerns about inflation and the possibility that the US economy may be slipping into recession have made them more volatile.
Demand to buy a home continues to fall as buyers face higher rates, record home prices, heightened recession risk and declining consumer confidence, said Sam Khater, chief economist at Freddie Mac.
“It’s clear that in the last two years, the combination of the pandemic, record low mortgage rates and the opportunity to work remotely spurred more demand,” Khater said. “Now, as the market adjusts to a higher rate environment, we are looking at a period of deflated selling activity until the market normalizes.”
Mortgage rates fell as investors anticipated another 75 basis point rate hike by the Federal Reserve at its meeting this Wednesday. It was the second increase of that size in as many months.
The Federal Reserve does not directly set the interest rates borrowers pay on mortgages. Instead, mortgage rates tend to trail 10-year US Treasuries, which fell last week ahead of the central bank’s meeting. But they are indirectly affected by the Fed’s efforts to control inflation.
The Fed also said on Wednesday that it may moderate its pace of interest rate hikes in coming months.
“The statement was welcomed by financial markets as a signal that the Fed expects inflation to slow more markedly, requiring a less aggressive response,” said George Ratiu, manager of economic research at Realtor.com. “These moves are expected to maintain upward pressure on borrowing costs, including mortgage rates, going forward.”
Borrowing costs grow
Consumers will feel the impact of the Fed’s hike in the coming months, Ratiu said, with credit card interest rates and new car loan rates rising in the coming billing cycles.
“Borrowers who have adjustable-rate mortgages, or those hoping to sign up for one soon, can expect a rate hike,” he said.
The higher costs of financing a home are already having an impact. Buyers are finding homes even less affordable as inflation eats up much of their income and rising borrowing costs have eroded their purchasing power.
A year ago, a buyer who put 20% down on a $390,000 median priced home and financed the rest with a 30-year fixed-rate mortgage at an average interest rate of 2.80% had a monthly mortgage payment $1,282, according to numbers from Freddy Mac.
Today, a homeowner buying a house of the same price with an average rate of 5.30% would pay $1,733 a month in principal and interest. That’s $451 more each month.
Demand among buyers is cooling
As a result of the high cost of buying a home, demand among buyers has slowed and many sellers are seeing their properties stay on the market longer.
“For those motivated to sell, price reductions are becoming a strategy,” Ratiu said. “We can expect the rebalancing in housing markets to continue and accelerate, especially as we look ahead to the fall and winter seasons.”
The Federal Reserve’s moves are designed to control inflation by reducing demand.
While home prices have continued to rise to record levels in June, the number of sales is falling.
Mortgage applications are also falling, declining last week for the fourth week in a row, according to the Mortgage Bankers Association.
“Increasing economic uncertainty and prevailing affordability challenges are deterring households from entering the market, leading to a decline in purchasing activity that is near the lows last seen at the start of the pandemic” said Joel Kan, MBA’s associate vice president of economic and industrial forecasting.