NEW YORK, NY — US mortgage rates have moved back above 7%, with the average 30-year fixed loan now at 7.49%. That jump is adding pressure to buyers who were already dealing with higher prices and a slower housing market.
Yahoo Finance senior housing reporter Claire Boston said the latest move is closely tied to bond markets, where yields have been climbing around the world. As borrowing costs rise in those markets, mortgage rates tend to follow.
The latest increase is also changing how buyers think about the market. Even when a loan still qualifies on paper, many would-be buyers are deciding the math no longer works for them.
Rising bond yields are pushing mortgage costs higher
Boston said the most recent jump in mortgage rates is really a bond yield story. Investors have been selling bonds globally, which has sent yields higher, including on the 10-year Treasury note that helps guide mortgage pricing.
She said the market is reacting to worries about inflation and the belief that the Federal Reserve may raise rates soon. When that happens, lenders generally reprice mortgages upward as well.
The move has been fast. Boston described the roughly 30-basis-point increase this week as unusually sharp, calling it a large week-over-week jump that is making home loans more expensive almost immediately.
A $400000 home now costs noticeably more each month
Boston put the increase into household terms for a typical buyer. On a $400,000 home with 20% down, a 6.75% mortgage rate would have meant a monthly payment of about $2,075.
At today’s 7.49% rate, that same loan would be more than $2,200 a month. That works out to roughly $160 more every month, even before taxes, insurance and other housing costs are added.
She said the jump may not push every borrower out of qualification, but it can still stop people from even starting the search. For many buyers, seeing a 7% handle on rates is enough to make them stay put and keep renting instead.
Fall housing activity is likely to soften further
Boston said the year-end stretch is already a slower period for housing, and the market is well past its spring peak. That matters because the latest rate move is arriving just as activity usually eases anyway.
She said many people who might have hoped to hunt for a fall bargain are now less likely to jump in. Even before the recent rate spike, sales were showing signs of weakening.
Because of that, Boston said the higher mortgage costs do not look promising for September and October housing numbers that will be released in the coming weeks. The added rate pressure could further cool an already softening market.
Condo financing is getting tighter under Fannie Mae and Freddie Mac
Boston also pointed to another challenge for buyers: tighter rules for condo financing. Fannie Mae and Freddie Mac, which support about 70% of the mortgage market, are changing how condo loans are reviewed.
Under the new approach, all condos must go through a full review of the building’s finances and the health of the homeowners association. That is meant to make sure reserves are adequate and the structure is safe.
Previously, highly qualified borrowers with strong credit and large down payments could often get a faster limited review. That shortcut is now gone, which could slow down some condo purchases even for buyers who are otherwise ready to close.
HOAs will need bigger reserves to avoid losing loan eligibility
Boston said another change is coming in the new year. Homeowners associations will need to reserve 15% of any monthly assessment for their reserve funds, up from the current 10% requirement.
Those reserves are meant to cover large repairs and other major costs. If an association does not meet the new standard, buyers may not be able to get a regular mortgage for units in that building.
That can create a problem even for well-qualified buyers. A person may have strong credit and a solid down payment, but if the building itself does not meet lending standards, the loan can still fall through.
Nonwarrantable condos can leave buyers with fewer and pricier choices
Boston said some condos can become what lenders call nonwarrantable, which means they do not meet standard financing rules. Reserve problems are one reason, but litigation or structural issues can also push a building into that category.
When that happens, buyers often have fewer options. Cash purchases are one alternative, and nonqualified mortgages may still be available in some cases, but those loans usually cost more than standard financing.
That is one reason condos have been under strain. Boston said prices are already falling in some places, and the tighter lending rules could make the market more difficult around the edges, even if they do not disrupt the entire housing sector.
More on what homes, rents and new builds are doing near you, on RHS Commoner.
