Mortgage rates fell again last week, dropping three basis points to an average of 2.96%, according to Thursday data from Freddie Mac‘s PMMS. Rates have now managed to stay within a five basis point range above or below 3% for nearly two months.
Higher mortgage rates historically have signaled a strengthened economy. But this is no ordinary economy: an apprehensive bond market has been keeping a close eye on global macroeconomic trends and Fed policy changes. Such factors have contributed to stagnating mortgage rates around the 3% mark.
“The economy is recovering remarkably fast and as pandemic restrictions continue to lift, economic growth will remain strong over the coming months,” said Sam Khater, Freddie Mac’s Chief Economist. “Despite the stronger economy, the housing market is experiencing a slowdown in purchase application activity due to modestly higher mortgage rates.”
However, Khater noted, it has yet to translate into lower home prices. A shortage of inventory will likely be a problem for years.
May data from Fannie Mae‘s Home Purchase Sentiment Index revealed homebuyers are feeling awfully discouraged by the housing market these days. The HPSI reported that just 35% of consumers believe now is a good time to buy a home, down from 47% in April. And those who believe it is a bad time to be a homebuyer increased to 56% from 48%.
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According to that same survey, mortgage rate expectations differed in May for prospective homebuyers and sellers with survey respondents torn between whether mortgage rates will go up or stay the same. Just 6% remained hopeful they will slide back down.
“Life for the builders has been good with mortgage rates at 3%,” said Logan Mohtashami, HousingWire’s lead analyst. “When mortgage rates go over 4%, life might not look so cheery. We know this because the last time mortgage rates hit 5%, we had a supply spike, and the builders’ stock felt this being down more than 25% from their recent peaks.”
He added: “We are far from those levels today, but this is something to keep in mind when housing market conditions change.”
According to Mohtashami, 2020 through 2021 saw the median sales price for new homes stay in check because builders provided some smaller homes into the sales mix, feeding the frenzy just enough while interest rates are low.
“It remains to be seen how this housing market will be affected by rising mortgage rates after the run-up in the median sales price,” Mohtashami said.
