The Blubber

Mortgage affordability in the US is at an all time low, per Bloomberg.

A recent surge in U.S. mortgage rates has led to the lowest level of affordability in nearly four decades, leaving prospective homebuyers facing a risky dilemma as they await potential relief.

The past year had offered a brief respite from the price hikes witnessed during the pandemic's peak, but this reprieve has now dissipated, with home values recovering nearly $3 trillion in lost value.

Currently, one key measure of borrowing costs has climbed to a level not witnessed in over two decades, and the Federal Reserve has signaled the possibility of further rate hikes, raising concerns that mortgage rates could reach as high as 8%.

"The resilience of the economy and the consumer has confounded a lot of people," remarked Melissa Cohn, Regional Vice President at William Raveis Mortgage. "At the beginning of this year, people were predicting that the Fed would actually be cutting rates by the end of the year, but the economy has withstood this higher-rate environment."

Mortgage rates, which played a central role in last year's housing slowdown, have been on the rise as the Fed increased its benchmark rate. Minutes from the July meeting indicated that policymakers recognized "significant upside risks to inflation," implying the potential for further rate hikes and additional upward pressure on mortgage rates.

As of Thursday, Freddie Mac reported an average rate of 7.09% on a 30-year fixed loan, the highest since 2002. Another metric from the Mortgage Bankers Association revealed the average contract rate for a 30-year fixed mortgage rising to 7.16% during the week ending August 11.

According to Melissa Cohn, some buyers with low credit scores and high debt-to-income ratios are receiving quotes in the 8% range. Those who are proceeding with mortgage applications at present do so with the hope of refinancing when rates eventually drop in a year or two. They also believe that purchasing now will secure lower prices compared to what they might face if rates ease and a surge of buyers enters the market.

However, potential buyers are currently navigating a landscape filled with "a lot of mixed messages," as observed by Bess Freedman, CEO of real estate brokerage Brown Harris Stevens. Consumers are uncertain about whether the Fed will continue to raise rates or what other developments may lie ahead.

"There's been a meaningful change in the economy," Freedman noted, highlighting that the nation has avoided a recession, and inflation has moderated. Nevertheless, the housing market remains sluggish, and challenges persist. "We're not out of the woods yet," she cautioned.