Average American Mortgage Payments Surge 96% in Four Years, Straining Homebuyers and Housing Market

Mortgage rates in the US climbed back above 7% last week, resulting in a decline in applications to finance home purchases. The contract rate on a 30-year fixed mortgage rose 10 basis points (bps), the steepest increase in over two months, to 7.03% in the week ending June 28. The five-year adjustable-rate mortgage also climbed 9 bps to a three-week high of 6.38%. As a result, a gauge of mortgage applications to buy a home fell 3.3%, marking the first decline since the end of May. The overall index of applications, which includes those for home purchases and refinancing, slipped 2.6%. The refinancing gauge fell for a third consecutive week [12664e8b].

Despite the rise in mortgage rates, the US economy continues to show resilience. Data from the US Bureau of Labor Statistics indicates that job openings have increased compared to the previous month. Additionally, the spring homebuying season has peaked, and listings are expected to decline in the latter half of the year. The upcoming election is also having an impact on mortgage pricing [45672f67].

The increase in mortgage rates has made it challenging for first-time homebuyers, who are already facing elevated mortgage rates and rising house prices. However, a slight drop in mortgage rates may not significantly help the housing market, as rates were much lower a few years ago. Current homeowners with low pre-2022 mortgages may also be reluctant to move if rates fall. While falling mortgage rates may not guarantee a decrease in home prices, price increases have slowed in recent months. Relief on mortgage rates will be key to the recovery of the housing market and to help first-time homebuyers [6bdbdc03].

Mortgage rates are influenced by economic factors, with the Federal Reserve setting the overall tone. The 10-year Treasury yield is the closest proxy for mortgage rates. The possibility of a rate cut before the end of the year has been indicated, but rates are not expected to go below 6% unless there is a significant economic slowdown. Fannie Mae, Freddie Mac, and the Mortgage Bankers Association all predict rates around 6.7% in the fourth quarter of the year. The spread between the 10-year Treasury yield and the mortgage rate can impact mortgage rates, with a narrower spread potentially leading to a decline in rates [5a230c7b].

Mortgage demand slipped last week as rates topped 7%. Mortgage applications decreased by 2.6% for the week ending June 28, with purchase applications down by 3% from the prior week. Refinancing activity was also down. The labor market may be slowing, as the ADP employment report showed that the private sector added 150,000 jobs in June, below economists' expectations. Layoffs were down 23.6% in June, with many concentrated in consumer products manufacturing and technology. Initial claims for unemployment benefits increased, but remain below the level that would signal a significant slowdown in job growth. Some Federal Reserve officials are closely monitoring this measure. The Federal Reserve may be patient before lowering interest rates, but recent favorable inflation data provide them latitude to respond to any unexpected weakening in the labor market [b4446b11].

Mortgage rates rose this week, but are still expected to decrease modestly in H2, according to the Freddie Mac Primary Mortgage Survey. 30-year fixed-rate mortgages averaged 6.95% as of July 3, up from 6.86% last week and 6.81% in the year-ago week. 15-year fixed-rate mortgages averaged 6.25%, compared to 6.16% in the previous week and 6.24% a year ago. Freddie Mac's chief economist, Sam Khater, stated that both new home and pending home sales are down, causing active listings to rise. However, rates are still expected to moderately decrease in the second half of the year, and with additional inventory, price growth should temper, benefiting interested homebuyers [2a2d26a5].

According to Zillow, the average mortgage payment in America has surged by 96% in the last four years. Homebuyers in major metropolitan areas now require an average down payment of $127,000 to purchase a home. 43% of homebuyers in 2023 reported relying on a financial gift from family and/or friends to help raise funds for the down payment. Rising home insurance costs in states at high risk of natural disasters contribute to increased mortgage payments. The housing market has shown signs of slowing down due to high down payments and interest rates [e2db545e].