US mortgage rates have risen for the seventh week in a row to 6.75 percent, the highest level in 16 years, prompting a drop in home loan applications.
In the last seven weeks, mortgage rates have soared 1.3 percentage points, the biggest increase since 2003 and reaching rates not seen since 2006.
It comes as the Federal Reserve continues to raise interest rates to combat runaway inflation, with the central bank raising rates four times this year, with a rate close to 0 percent in February now at 3.25 percent.
Rising mortgage rates resulted in a more than 14 percent drop last week in applications to buy or refinance a home, according to data from the Mortgage Bankers Association (MBA) published on Wednesday.
Joel Kan, vice president of Economic and Industrial Forecasting at the MBA, said applications have declined at their slowest pace since 1997 as the nation reels from enjoying record-low mortgage rates during the pandemic.
“The sharp rise in rates continued to stall refinancing activity and is also weighing on purchase applications, which are down 37 percent from last year’s pace,” Kan added.
Mortgage rates hit 6.75 percent last week, the highest level since 2006, as the Federal Reserve continues to implement interest rate hikes to quell inflation.
Rate hikes have caused applications to buy or refinance homes to drop 14 percent
The spike in mortgage rates comes as mortgage payments are also seeing a dramatic increase, rising $337 in the last six weeks, according to a Redfin report.
This is causing potential home buyers to chicken out and decide not to buy in today’s market.
Also, homes are staying on the market longer, causing homeowners to drop prices to the highest level since 2015.
Since January, pending sales have not been at their current low, while the number of homes selling below market rates is at its highest level since 2020. While new homes for sale are down a 14 percent from the same time in 2021.
Redfin’s Jason Aleem said: ‘It is imperative that home sellers react quickly and aggressively as the market changes.
‘This means adjusting your price right away if you want to be competitive and attract offers from a smaller pool of qualified homebuyers. If your house is not the ‘belle of the ball’ in your neighborhood, you will have to reduce the price to sell it.’
According to the Redfin report, the rise in mortgage rates of about seven percent is the highest since July 2007, shortly before the crash that triggered the Great Recession.
One of Redfin’s key indicators of the decline in potential buyers is the fact that “homes for sale” as a Google search term dropped 33 percent this September compared to the same period last year.
New home listings are down 14 percent from a year ago.
The Manhattan real estate market is among those experiencing the biggest hit, with sales falling 18 percent in the fiscal third quarter, the first drop in sales since 2020, according to Miller Samuel and Douglas Elliman.
Despite the drop in sales, prices remain extremely high in Manhattan, with the median price of an apartment rising 4 percent to $1.96 million. However, experts say those price increases are also slowing.
The last time apartment sales fell in the district was in the fourth quarter of 2020, still in the midst of the pandemic, when sales fell 21 percent.
Miller Samuel CEO Jonathan Miller told CNBC that “the boom in Manhattan has come to a halt.”
The biggest drops come from some of the most expensive properties, with antebellum apartments along Park and Fifth Avenues, as well as Central Park West, not selling for months, even years.
Miller said: “Between the volatility in the financial markets and rising rates, we’re seeing the top end disappoint.”
New York City’s real estate crisis may not be limited to office buildings alone, as apartment sales fell by double digits in the third quarter.
The housing market is cooling in the US in the post-pandemic era, with the highest concentration seen in California and Florida
Economists have generally warned that home price growth is expected to come to a complete halt in the US next year due to declining demand and too much property up for grabs.
The problems in housing markets are only exacerbated by an impending recession triggered by interest rate hikes by the Federal Reserve.
In late September, the Federal Reserve raised interest rates for the fourth time in an attempt to stifle inflation.
It was the third consecutive increase of 0.75 points, which was the largest increase the Fed implemented in more than two decades.
The latest increase takes the Fed’s policy rate (seen since 1980) to the highest level since the 2008 financial crisis
The Fed’s move last month pushed its short-term benchmark rate, which affects many consumer and business loans, to a range of 3 percent to 3.25 percent, the highest level since early 2008.
Fed officials have forecast they will raise their benchmark rate further to about 4.4 percent by the end of the year, one point higher than forecast in June.
And they hope to raise the rate again next year, to about 4.6 percent. That would be the highest level since 2007.