Mortgage rates tick up as the year kicks off

Mortgage rates kicked off the year by marching higher, making affordability again a top concern among homebuyers in 2023.

The average rate on the 30-year fixed mortgage inched up to 6.48% from 6.42% the week prior, according to Freddie Mac. That marks two straight weeks of increases after the rate steadily declined since mid-November and is the highest level to start a new year since 2002, when the rate was 7.14%.

Without a meaningful decline in rates and recession fears still brewing, housing activity likely will remain muted, experts said, with both buyers and sellers waiting out the seasonally slow winter.

“Mortgage application activity sunk to a quarter century low this week as high mortgage rates continue to weaken the housing market,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “While mortgage market activity has significantly shrunk over the last year, inflationary pressures are easing and should lead to lower mortgage rates in 2023.”

Buyers strayed from purchase plans

Demand for purchase mortgages remained scarce toward the year-end, the latest survey from the Mortgage Bankers Association found. Purchase activity was down 12.2% from two weeks earlier and 42% lower than a year ago. Overall, purchase demand hit its lowest level since 1996.

The dip in demand was not surprising during the holidays, Joel Kan, MBA’s vice president and deputy chief economist said in a statement, noting that rates also ended the year “well above 6% and the threat of a looming recession” continued to sour many buyers’ purchase plans.

Blaine, Minnesota, Sign advertising new one level homes for sale starting at 450,000 dollars. (Photo by: Michael Siluk/UCG/Universal Images Group via Getty Images)

Going into 2023, affordability remains a big disincentive. Just take a look at the numbers.

The payment on a median-priced home increased from $1,443 in January 2022 to $2,285 at the end of last month after putting 10% down. That payment takes up 30.2% of a buyer’s monthly household income, according to calculations Realtor.com exclusively shared with Yahoo Finance, nearly 50% more than in January.

Even if rates come down following a recession this year, it’s unlikely that will ease buyers budgets.

“If things economically fall off a cliff at some point and mortgage rates fall a little more say nearing 5.5%, that’s not really all that cheap relative to what most potential homebuyers expect,” Keith Gumbinger, vice president of HSH.com, told Yahoo Finance. And “if you’re looking for a lateral move, or a bigger house, you’re facing both higher interest rates and still high home prices.”

Number of homes for sale continued to drop

Scott Teel carries a 'for sale' sign, as part of his second job as a real estate agent, in Moore, Oklahoma. (Credit: J Pat Carter /AFP via Getty Images)

Scott Teel carries a ‘for sale’ sign, as part of his second job as a real estate agent, in Moore, Oklahoma. (Credit: J Pat Carter /AFP via Getty Images)

A growing number of home sellers are also pulling their listings off market this winter, as homebuyer demand remains low.

The inventory of homes for sale in December shrunk by 26.8% over the past year, Realtor.com data found, compared with a 26% drop in November. That’s the third straight month where the number of homes for sale declined.

For buyers still in the market, the triple whammy of inflation, climbing interest rates and home prices registered over the past year have been an obstacle many have yet to recover from, experts say.

“We had record low mortgage rates just a little over a year ago,” Gumbinger said. “For most potential homebuyers today, the 7% run we saw at the end of last year is the first time they’ve ever seen rates that high.”

Newly listed homes for sale in December also decreased by 6.1% year over year, according to Realtor.com, with sellers listing at rates 12.9% lower than typical 2017 and 2019 levels. That’s the fourth month of declining new seller activity, adding to already strained inventory bottlenecks.

And those sellers who don’t pull their listings must readjust their pricing expectations. The share of home price reductions climbed from August to November, retreating only marginally in December.

“As a seller, you’re probably not in a hurry to sell your home that was worth $450,000 last year and is now worth $300,000,” Gumbinger said. “They are saying, ‘to hell with it, I’ll stay here.’”

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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