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Rising Mortgage Rates Affects Home Prices

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The highest share of sellers on record dropped their list price during the four weeks ending June 12, according to a report from Redfin.

This comes as mortgage rates surged to levels not seen since 2008, dwindling the pool of home shoppers.

The 30-year mortgage rates recorded the biggest one-week jump in 35 years after the Federal Reserve raised its key rate by three-quarters of a point in bid to curb high inflation.

"Mortgage rates surged as the 30-year fixed-rate mortgage moved up more than half a percentage point, marking the largest one-week increase in our survey since 1987," said Sam Khater, Freddie Mac's Chief Economist. "These higher rates are the result of a shift in expectations about inflation and the course of monetary policy. Higher mortgage rates will lead to moderation from the blistering pace of housing activity that we have experienced coming out of the pandemic, ultimately resulting in a more balanced housing market."

The 30-year fixed-rate mortgage or FRM averaged 5.78 percent for the week ending June 16, 2022, up from 5.23 percent last week. A year ago at this time, the average rate was 2.93 percent.

According to Redfin, a typical buyer with a 30-year fixed-rate mortgage is looking at a monthly payment of $2,514, up from $1,692 a year ago.

Homes are more likely to sit on the market for a few weeks, compared to last year when they would go under contract within a week, and home prices are being bid up less often than they were earlier in the spring.

"The housing market isn't crashing, but it is experiencing a hangover as it comes down from an unsustainable high," said Redfin deputy chief economist Taylor Marr. "Housing demand has already cooled significantly to the point that the industry has begun facing layoffs. This week's rate hikes will further stretch homebuyers' budgets to the point that many more may be priced out. While a lot of home sellers are already dropping their prices, more homeowners will likely decide to stay put now that the mortgage rate on a new home is significantly higher than their current one."

Redfin adds that, on average, 5.6% of homes for sale each week had a price drop, a record high as far back as the data goes, through the beginning of 2015. In other words, 22.4% of homes for sale during the entire four-week period had a price drop.

"If it weren't for the surge in mortgage rates, the housing market would still be in a boom right now," said Redfin Bay Area real estate agent James Cappello. "Demand from homebuyers was still extremely high as recently as February, but rates are making it really tough. Going from 3% to nearly 6% almost instantly has scared a lot of people out of the market."

Mortgage applications are down more than 15 percent from last year and refinancings are down more than 70 percent, according to the Mortgage Bankers Association.

The online real estate broker Redfin, under pressure from weakening housing market, also announced earlier this week that it was laying off 8 percent of its workers.

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