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Mortgage

Homebuyers increasingly seek ARMs as mortgage rates soar 

Mortgage rates climb again on the back of still-hot inflation levels

Mortgage rates have more than doubled from the beginning of the year and homebuyers facing affordability challenges are increasingly turning to adjustable-rate mortgages (ARMs) to reduce their monthly payments.

The latest weekly survey data from Freddie Mac shows the 30-year fixed-rate mortgage rose two basis points from last week to 6.94%, slowing its upward trajectory this week. A year ago at this time, rates averaged 3.09%.

“The 30-year fixed-rate mortgage continues to remain just shy of 7% and is adversely impacting the housing market in the form of declining demand,” Sam Khater, Freddie Mac’s chief economist, said in a statement. 

The Freddie Mac’s index compiles purchase mortgage rates reported by lenders during the past three days. It’s focused on conventional, conforming, fully amortizing home purchase loans for borrowers who put 20% down and have excellent credit. 

Other indexes show higher rates. 

On HousingWire’s Mortgage Rates Center, Black Knight’s Optimal Blue OBMMI pricing engine, which also includes some refinancing products, measured the 30-year conforming rate at 7.026% on Wednesday, up from 6.939% the previous week. Meanwhile, the 30-year fixed-rate jumbo (greater than $647,200) went from 6.549% to 6.746% in the same period.

Mortgage rates were 7.22% for conforming and 6.15% for jumbos at Mortgage News Daily on Wednesday, a spread of 107 bps.  

ARMs pick up steam

Though price growth has cooled and prices have begun to come down, high and still climbing mortgage rates mean many of today’s buyers face larger home payments than they would have when home prices were at their peak 

Hannah Jones, economic data analyst at Realtor.com.

Borrower demand slumped with mortgage demand hitting a 25-year low last week amid the ongoing economic uncertainty and affordability challenges. In turn, homebuyers looking for rate relief turned to various ARM products to reduce their monthly mortgage payment. 

“Mortgage rates keep trending higher because inflation stubbornly refuses to abate,” said Holden Lewis, home and mortgage expert at NerdWallet. “That’s why one in eight loan applications are for adjustable-rate mortgages.”

The overall ARM loan share rose to 12.8% of all applications last week, marking a 14-year high, according to the Mortgage Bankers Association (MBA). Rates for 5/1 ARMs ticked up to 5.65% last week from the prior week’s 5.56%.

“ARM loans continue to remain a viable option for borrowers who are still trying to find ways to reduce their monthly payments,” said Joel Kan, MBA’s vice president and deputy chief economist.

Historically, it’s still roughly “a third of the peak seen in the early 2000s,” said Bob Broeksmit, President and CEO of the MBA.

Buyers, builders and sellers take a step back as inflation persists 

Surging mortgage rates reflect the Federal Reserve’s tightening monetary policy to tame inflation. The annual U.S. inflation rate was little changed last month, rising 8.2% year over year and up 0.4% compared to August’s 0.1%, according to the Bureau of Labor Statistics last week. 

The Fed increased its benchmark rate five times this year, which included three consecutive 0.75% hikes.

Treasury yields show higher rates in the short term, signaling a recession on the horizon. The 2-year note, closely tied to the Fed’s interest rate moves, increased 27 bps to 4.55% on Wednesday from the prior week. The 10-year note went to 4.14% from 3.91% in the same period. 

At its most recent Federal Open Markets Committee meeting, officials largely agreed that it was better to aggressively raise interest rates now to avoid economic pain down the road. Markets widely expect a similar-size rise to be approved at the next meeting in early November.

On the heels of heightened mortgage rates and persistent inflation, buyers, builders and sellers have taken a step back to consider their best course of action. Home purchase sentiment hit its lowest level since 2011 and home builder sentiment fell for the 10th consecutive month in September as construction activity slowed. Sellers are responding to the shift in the market and pulling back on listing activity, resulting in a 9.8% decrease in new listings compared to last year and even further below 2019 levels, according to Realtor.com.

“Though price growth has cooled and prices have begun to come down, high and still climbing mortgage rates mean many of today’s buyers face larger home payments than they would have when home prices were at their peak,” said Hannah Jones, economic data analyst at Realtor.com.

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