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Mortgage rates fall as fears about the US economy loom

Mortgage rates dropped last week as fears grow that the US economy is entering a recession.

The 30-year fixed-rate mortgage averaged 5.30% in the week ending July 28, down from 5.54% the week before, according to Freddie Mac. That is still significantly higher than this time last year when it was 2.80%.

Rates rose sharply at the start of the year, hitting a high of 5.81% in mid-June. But since then, concerns about inflation and the possibility that the US economy may be entering a recession have made them more volatile.

The demand to buy a home continues to tumble as buyers face higher rates, record-high home prices, increased recession risk, and declining consumer confidence, said Sam Khater, Freddie Mac's Chief Economist.

"It's clear that over the past two years, the combination of the pandemic, record low mortgage rates, and the opportunity to work remotely spurred greater demand," Khater said. "Now, as the market adjusts to a higher rate environment, we are seeing a period of deflated sales activity until the market normalizes."

Mortgage rates fell as investors anticipated yet another 75 basis-point rate hike from the Federal Reserve at its meeting on Wednesday. It was the second hike of that size in as many months.

The Federal Reserve does not set the interest rates borrowers pay on mortgages directly. Instead, mortgage rates tend to track 10-year US Treasury bonds, which fell last week ahead of the central bank's meeting. But they are indirectly impacted by the Fed's efforts to tame inflation.

The Fed also said Wednesday that it may moderate its pace of interest rate increases in the months ahead.

"The statement was welcomed by financial markets as a sign that the Fed expects inflation to slow more noticeably, requiring a less aggressive response," said George Ratiu, manager of economic research. "These moves are expected to keep upward pressure on borrowing costs, including mortgage rates, moving forward."

Costs of borrowing grow

Consumers will feel the impact of the Fed's increase over the next couple of months, Ratiu said, with credit card interest rates and rates for new car loans rising in the next few billing cycles.

"Borrowers who have adjustable-rate mortgages -- or those who are expecting to sign up for one soon -- can expect to see a bump in rates," he said.

The higher costs to finance a home are already having an impact. Buyers are finding homes even less affordable as inflation takes a larger chunk of their income and the rising cost of borrowing has reduced their purchasing power.

A year ago, a buyer who put 20% down on a median priced $390,000 home and financed the rest with a 30-year, fixed-rate mortgage at an average interest rate of 2.80% had a monthly mortgage payment of $1,282, according to numbers from Freddie Mac.

Today, a homeowner buying the same priced house with an average rate of 5.30% would pay $1,733 a month in principal and interest. That's $451 more each month.

Demand among buyers is cooling off

As a result of the high cost of buying a home, demand among buyers has slowed and many sellers are seeing their properties sit longer on the market.

"For those motivated to sell, price reductions are becoming a go-to strategy," Ratiu said. "We can expect the re-balancing in housing markets to continue and to pick up speed, especially as we look toward the fall and winter seasons."

The Federal Reserve's moves are designed to tamp down inflation by reducing demand.

While home prices have continued to climb to record highs in June, the number of sales is falling.

Applications for mortgages are also dropping, declining last week for the fourth consecutive week, according to the Mortgage Bankers Association.

"Increased economic uncertainty and prevalent affordability challenges are dissuading households from entering the market, leading to declining purchase activity that is close to lows last seen at the onset of the pandemic," said Joel Kan, MBA's associate vice president of economic and industry forecasting.

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