Affordability has improved in the mortgage market since December, thanks to declines in mortgage rates and a slowdown in home price appreciation.
Here’s a spoiler: Industry experts believe this trend will continue for months, signaling that a good spring is ahead.
“It’s been the rise in prices [and] interest rates that have constrained affordability,” Doug Duncan, senior vice president and chief economist at Fannie Mae, said in an interview.
However, if the U.S. economy goes through a mild recession, as the economist expects, mortgage rates are likely to come down as a function of the job losses, causing home price appreciation to remain slow.
“Those things will improve affordability,” Duncan said.
Regarding mortgage rates, Freddie Mac’s latest report showed on Thursday morning that the 30-year fixed mortgages dropped to 6.13% as of January 26, down two basis points from the previous week. Rates were at 3.55% one year ago. At Mortgage News Daily, rates were at 6.18%, down three basis points from the previous day.
According to industry experts, rates will continue to go down, reaching the high 5s at the end of the year.
“Mortgage rates continue to tick down and, as a result, home purchase demand is thawing from the months-long freeze that gripped the housing market,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “Potential homebuyers remain sensitive to changes in mortgage rates, but ample demand remains, fueled by first-time homebuyers.”
Regarding home prices, Holden Lewis, a home and mortgage expert at NerdWallet, said some home builders reduced prices to stimulate sales.
“In December, the typical new home costs almost $50,000 less than in October. The combination of lower rates and lower prices boosted sales in December and might be doing the same in January,” Lewis said in a statement.
A good spring ahead?
Affordability deteriorated in 2022. Overall, mortgage payments increased by about 40%, or $534, according to the MBA purchase applications payment index (PAPI).
However, the national median payment applied for by purchase applicants decreased to $1,920 in December, down from $1,977 in November and $2,012 in October, the data shows.
“There was a slight improvement in homebuyer affordability last month as mortgage rates fell by 37 basis points from November,” Edward Seiler, MBA’s associate vice president for housing economics and executive director at the Research Institute for Housing America, said in a statement.
Seiler added, “With inflation cooling slightly, MBA expects both mortgage rates and home-price growth to soften, which along with cooling inflation, should help bring more prospective buyers into the market during the spring homebuying season.”