BuyingMarket Trends November 8, 2022

Buyers Embrace Adjustable Mortgages as Rates Surpass 7%

Rising interest rates have increased the average monthly loan payment by a whopping $1,000 year over year.

With the rate for a 30-year mortgage rising to 7.08% this week—the highest average since April 2002, according to Freddie Mac—the average monthly loan payment is now $1,000 more than a year ago, Nadia Evangelou, senior economist and director of forecasting for the National Association of REALTORS®, writes on the Economists’ Outlook blog.

That’s prompting a sharp pullback in the housing market as home buyers digest the higher rates. Mortgage applications for home purchases—a gauge of homebuying activity—are nearly half of what it was a year ago, the Mortgage Bankers Association reported this week.

Trying to snag a lower rate, more home buyers are reaching for an adjustable-rate mortgage, which tend to have lower introductory rates for a set period of time before resetting. Though ARMs are viewed as a riskier loan product, home buyers are being tempted: This week’s rate for a 5-year ARM is 5.96%. The share of home buyers applying for an ARM has more than quadrupled since the start of the year, MBA reports.

Higher mortgage rates are creating a “greater stagnation in the housing market,” says Sam Khater, Freddie Mac’s chief economist. “As inflation endures, consumers are seeing higher costs at every turn, causing further declines in consumer confidence this month. In fact, many potential home buyers are choosing to wait and see where the housing market will end up, pushing demand and home prices further downward.”

S&P’s CoreLogic Case-Shiller Index shows home prices fell at a record pace in August, dropping 2.6% in monthly comparisons from a year ago. Existing-home sales also are sliding, down 24% year over year in September, according to NAR data. And problems continue to brew for the new-home market, which saw sales plunge nearly 18% in September compared to a year earlier, prompting home builders to press the brakes on future construction, the Commerce Department reports.

Freddie Mac reports the following national averages with mortgage rates for the week ending Oct. 27:

  • 30-year fixed-rate mortgages: averaged 7.08% with an average 0.8 point, up from last week’s 6.94% average. Last year at this time, 30-year rates averaged 3.14%.
  • 15-year fixed-rate mortgages: averaged 6.36%, with an average 1.4 point, up from last week’s 6.23% average. A year ago, 15-year rates averaged 2.37%.
  • 5-year adjustable-rate mortgages: averaged 5.96%, with an average 0.3 point, increasing from last week’s 5.71% average. A year ago, 5-year ARMs averaged 2.56%.

Freddie Mac reports commitment rates along with average points to better reflect the upfront costs of obtaining the mortgage.


By: Melissa Dittmann Tracey