By Mortgage rates are on the rise, with some lenders already offering rates of over 8% to home buyers, according to experts in the industry.
The increase in mortgage rates is closely tied to the surge in the 10-year Treasury yield. On Tuesday, the yield reached 4.8%, its highest level since August 2007, as reported by Dow Jones Market Data. This upward trend in yields has directly impacted mortgage rates.
As of October 3, the 30-year mortgage rate has reached its highest point in 23 years, standing at an alarming 7.72%, as noted by Mortgage News Daily.
In fact, certain buyers have already encountered mortgage rates exceeding 8%, revealing the harsh reality of the current market conditions. Melissa Cohn, regional vice president of William Raveis Mortgage, states, “Considering that rates were at 3% less than two years ago, rates over 8% will give more potential buyers a reason to pause.”
Additionally, borrowers with lower credit scores or non-prime borrowers are also experiencing the impact of rising rates. John Toohig, head of whole loan trading at Raymond James, explains, “Given the spread between the 10-year Treasury and the 30-year mortgage rate, we’re right at the cusp of the tragic 8% number.”
According to the Brookings Institute, non-prime borrowers can be classified into various categories, including younger individuals with limited credit experience, those with a history of bad credit, individuals with fluctuating and difficult-to-document income, and people who have faced significant credit problems due to medical issues or divorce.
Why are rates rising?
The surge in rates can be attributed to positive economic indicators signaling a strong U.S. economy.
For instance, on Tuesday, job openings reached 9.6 million, reflecting the high demand for workers in an economy that is steadily growing. This marks a significant rebound from the revised figure of 8.9 million job openings in July, which represented the lowest level in almost two and a half years, according to the Labor Department.
Overall, as the 10-year Treasury yield continues to increase, mortgage rates are following suit. With rates already surpassing 8% for some buyers, it has become crucial for potential home buyers and borrowers to carefully consider their options amidst these challenging market conditions.
Good news for U.S. economy poses challenges for mortgage industry
The positive news surrounding the resilience of the U.S. economy is having a negative impact on the mortgage industry. This is due to the fact that it provides further incentive for the Federal Reserve (Fed) to continue raising interest rates throughout the year, as well as keeping rates elevated for a longer period. According to experts in the field, this situation is likely to create obstacles for both potential buyers and demand within the housing market.
What happens at 8%?
Breaking through the 8% interest rate mark will signify a significant psychological barrier. However, it is important to note that earlier this year, when rates crossed the 7% threshold, it was also a noteworthy milestone for buyers. The increase in rates translates to borrowers facing hundreds of dollars in additional monthly costs, which not only limits their budget but also places a heavier burden on their income when financing a home purchase.
The percentage of mortgage debt in relation to consumer spending has now surpassed 40%, a figure that becomes even more concerning when considering inflationary pressures. An interest rate of 8% will only worsen this situation, reducing home-buying demand even further.
“As bond yields continue to rise, more and more consumers will see their rates go over 8%. Considering that rates were at 3% less than two years ago, rates over 8% will give more potential buyers a reason to pause,” stated an industry expert. It is worth noting that even a decrease to 7% may be enough to entice some buyers back into the market, given current conditions.
When will rates fall?
According to experts, interest rates are only expected to decrease once the Fed indicates that it has finished raising rates and when economic data point towards a slowdown. This includes signs of a weakening job market. Until then, rates are expected to remain high.
“I think we’re here for a minute. We may see some slight pullback, but nothing like what I think the market is hoping for,” mentioned another industry professional. It seems that unless there are clear indicators of the U.S. economy cooling off, rates are likely to remain elevated in the foreseeable future.
The attention within the mortgage industry will now shift to when the first interest rate cut will occur. Each positive job report extends the timeline for a potential rate cut, making it even more uncertain as to when relief may be expected.
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