With mortgage rates nearly doubling since last year, it’s ‘increasingly clear’ a correction is coming

At the current interest rate, the monthly mortgage payment for a median-priced home is 59% higher than it was a year ago, according to Realtor.com.

Steeper borrowing costs, coupled with still-painful home prices, are cooling the market considerably.

“It’s becoming increasingly clear that the real estate markets are headed for a correction,” says George Ratiu, senior economist with Realtor.com.

Don’t miss

• Mitt Romney says a billionaire tax will trigger demand for these two physical assets — get in now before the super-rich swarm
• There’s a ‘perfect storm’ brewing in the multifamily housing market — here are 3 of the easiest ways to take advantage
• Warren Buffett likes these 2 investment opportunities outside of the stock market

30-year fixed-rate mortgages

The average rate on a 30-year fixed home loan is 5.54%, up from 5.51% last week, housing finance giant Freddie Mac reported Thursday. This time last year, the 30-year rate was averaging 2.78%.

The market is feeling the heat as the rate inched up for the second week in a row. Mortgage demand has dropped to its lowest level in over two decades, and sales have fallen for the fifth straight month.

Competition is plummeting as would-be buyers are dropping out of the home buying process.

Some 60,000 purchase agreements were canceled last month, according to the Redfin real estate firm. That amounts to 14.9% of the homes that went under contract during the month and a near record.

“Consumer concerns about rising rates, inflation and a potential recession are manifesting in softening demand,” says Sam Khater, Freddie Mac’s chief economist. “As a result of these factors, we expect house price appreciation to moderate noticeably.”

Average home price appreciation is expected to come in at 4% next year, down from 12.8% this year, according to a new forecast from Freddie Mac.

15-year fixed-rate mortgages

The 15-year fixed-rate mortgage — popular with refinancing homeowners — is averaging 4.75%, up from 4.67% last week, Freddie Mac says. The 15-year rate is more than double where it was last year at this time when it averaged 2.12%.

The steeper rates are causing the housing market to rebalance in many areas. In Austin, for example, buyers are regaining bargaining power as sales last month fell 20% and new listings rose by the same amount.

“When we look at the data across the Austin housing market, it reinforces what we see on a national scale: a combination of cooling demand from the tremendous surge in mortgage rates and rising prices with a noticeable increase in supply,” Ratiu says.

“The shift signals welcome news for more buyers who may be ready to embrace a post-pandemic reality and take advantage of more inventory.”

5-year adjustable-rate mortgages

At 4.31%, the five-year adjustable-rate mortgage — or five-year ARM — is actually down from last week when it was averaging 4.35%. Last year at this time, the shorter-term rate averaged 2.49%.

Rates on adjustable mortgages are tied to the prime rate. ARMs start off with lower interest costs, but they can surge once the initial fixed-rate period ends.