mortgage rate update September 19th 2023

 30-Year Fixed Mortgage Rates Reach 22-Year High: Implications for Homebuyers and Builders

In a notable shift, the average rate for the popular 30-year fixed mortgage hit 8% on a Wednesday morning, a level not seen since the early 2000s, as reported by Mortgage News Daily. This milestone was reached in the wake of surging bond yields, reminiscent of levels not witnessed since 2007, as mortgage rates tend to loosely follow the yield on the 10-year U.S. Treasury.

Rising Rates Amid Economic Signals

Mortgage rates witnessed a significant surge over the past couple of weeks, driven by investors grappling with evolving economic data. In the most recent instance, it was housing starts, which experienced an increase in September, albeit falling short of expectations, according to the U.S. Census Bureau. Meanwhile, building permits, considered an indicator of future construction, experienced a decline, though less than anticipated. The prior week saw retail sales exceeding expectations, contributing to increased uncertainty regarding the Federal Reserve's long-term strategy.

These escalating rates have resulted in a substantial drop in mortgage demand. According to the Mortgage Bankers Association, mortgage applications plummeted by nearly 7% in the previous week compared to the week before.

Matthew Graham, Chief Operating Officer of Mortgage News Daily, noted, "Here's another milestone that seemed extreme several short months ago. The fact is that many borrowers have already seen rates over 8%. That said, many borrowers are still seeing rates in the 7s due to buydowns and discount points."

Homebuilders' Strategic Response: Buydowns

To help prospective homebuyers contend with the rising rates, homebuilders are deploying buydowns as a crucial incentive through their mortgage subsidiaries. While this tactic was previously used sparingly, it has now become the top incentive offered by builders, according to industry sources.

A spokesperson from D.R. Horton, the nation's largest homebuilder, mentioned, "Although our mortgage company has been offering slightly below market rate loans most of this cycle (just to be competitive), the full point buydown for the 30-year life of the loan we've been referring to recently as a builder incentive is not something we had done in previous cycles, at least not on the broad, majority basis we are doing so today."

The Impact on Homebuyers

To provide some context, the average rate on the 30-year fixed mortgage was as low as 3% just two years ago. For prospective homebuyers, this means that a purchaser of a $400,000 home with a 20% down payment would now have a monthly payment nearly $1,000 higher compared to two years ago. The rise in rates is reshaping the dynamics of the real estate market, emphasizing the importance of proactive financial planning for homebuyers and a strategic shift among homebuilders to remain competitive in this evolving landscape.