Halloween isn’t over yet, but homebuyers may already be getting a little spooky.
The 30-year fixed mortgage, which most buyers rely on, jumped from about 6% to nearly 6.75% in about three weeks.
This happened right after the Fed finally cut the federal funds rate. Good timing I know.
Before this rate reversal, mortgage rates had been steadily declining from 8%, their current cycle high which ironically occurred just before last Halloween.
Talk about a good year for rates, down a full two percentage points. But this trend is no longer our friend, at least for now.
Now I would like to explain why this might be good for the housing market.
Higher mortgage rates may stimulate more than falling rates
I know what you’re thinking, high mortgage rates can’t be good for a struggling housing market.
Especially this housing market, which is currently one of the most unaffordable in modern history.
But bear with me here. I’ve been thinking recently about how low mortgage rates don’t seem to keep potential homebuyers flying over the fence.
As mentioned, interest rates have fallen slightly from their session highs, falling by about 2 percentage points.
In mid-September, you can get a 30-year fixed installment for about 6% for the average loan scenario. In fact, it would be much less if you had a vanilla loan (high FICO, 20% down, etc.) and/or went with a discount lender.
The same applies if you pay discount points at closing. I was even tripping over interest rates in the high 4% range at the time.
This will certainly be good enough to attract potential buyers. But mortgage application data did not respond.
You can blame seasonality, since it’s the perfect time for prices to hit their lowest levels since early 2023.
But if you look at the Mortgage Bankers Association (MBA) seasonally adjusted Home Purchase Order Index, you’ll see that it’s barely budged. See the chart above Trading economics.
At the same time, refinancing requests have risen, as they are more sensitive to interest rates. However, due to the best prices in years, homebuyers were not showing up.
This was surprising because there was a narrative that they would flock to the housing market when second rates fell.
In fact, there have been those who have argued that you should buy a home early to beat the rush. This too seems to be nothing more than a misleading dream. This may all be related incentivize.
Homebuyers may have wanted lower mortgage rates
With the power of hindsight, it may have been the idea that low mortgage rates make homebuyers hungry.
It’s a weird psychological thing. Once you get a little of a good thing, you want more. And once you get more, it’s not as good as it used to be. You need more.
It’s simply that falling mortgage interest rates were less stimulating than rising interest rates, which is as strange as it may sound.
When prices rise, there is a very urgent need to stabilize the price before it gets worse.
When prices drop, you may bide your time and hope for the best. And it seems that this is exactly what the potential buyers did.
Although they had previously been asked to beat the rush, they may now be asked to wait. So low interest rates not only prevented buyers from moving away from the sidelines, but also contributed to their further entrenchment.
Of course, I recently claimed that it is no longer about mortgage rates, and could actually be about other things.
There may be uncertainty regarding the economy, it may be homebuyer fatigue, or it may simply be that home prices are too high. Yes, that’s a possibility too!
However, and this is the strangest thing, now that buyers are spooked by rising prices, it may prompt them to jump the fence!
(image: Marcin Wichari)
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My work experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) homebuyers better navigate the home loan process. Follow me on Twitter for hot takes.
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