Mortgage rates slipped below 7% this week, but it wasn’t enough to boost housing activity as mortgage applications continued to decline amid the Federal Reserve hiking its benchmark interest rate for the sixth time this year.

The average 30-year, fixed-rate mortgage dipped to 6.95% the week ending November 3, according to Freddie Mac. This is a 13 basis-point drop from last week (a basis point is one-hundredth of a percentage point), and the first decline in rates in three weeks. Still, mortgage rates have more than doubled since early January, when the average 30-year, fixed-rate was 3.22%.

The 15-year, fixed-rate mortgage averaged 6.29% this week, down from 6.36% last week but up from 2.35% a year ago.

The average 5/1 adjustable-rate mortgage (ARM) was at 5.95%, down slightly from 5.96% last week but up from 2.54% a year ago. As borrowing costs have surged, ARMs have become more popular since they now have a lower rate than fixed-rate mortgages. The share of ARM applications made up 11.8% of all applications for mortgages for the week ending October 28, down from 12.7% the week before, according to the Mortgage Bankers Association (MBA). ARMs comprised just 3% of all mortgage applications in January 2022.

The rates above don’t include fees or other costs associated with obtaining home loans.

Mortgage Rates Forecast Into 2023

Mortgage rates have hit some extreme highs and lows this year, with the 30-year, fixed-rate dropping down to 4.99% on August 4 then hitting a 20-year high of 7.08% last week. Rising rates have been due, in part, to the Fed’s aggressive strategy of hiking the federal funds rate six times this year in an effort to tamp down inflation.

The Fed has signaled that its monetary policy tightening is likely to continue, which will indirectly impact mortgage rates. Long-term mortgage rates are directly tied to the bond market, which reacts to the Fed’s actions and monetary policy.

“The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” the Federal Open Market Committee (FOMC) said in a prepared statement, following its November policy meeting this week.

However, the FOMC also indicated that it may be approaching an inflection point, hinting at its openness to scale back future rate increases.

“The Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the statement read.

Most housing experts say mortgage rates will average around 5% to 6% next year.

Homebuyers Hit the Brakes Amid Rising Rates

Homebuyers have continued to react to high mortgage rates in recent months by pulling back on applying for a mortgage. Applications fell by 0.5% for the week ending October 28, representing the sixth consecutive week of declines, according to the MBA.

“These elevated rates continue to put pressure on both purchase and refinance activity and have added to the ongoing affordability challenges impacting the broader housing market, as seen in the deteriorating trends in housing starts and home sales,” said Joel Kan, MBA’s vice president and deputy chief economist, in a statement.

Existing-home sales dropped 1.5% from August to September, marking the eighth consecutive month of declining sales, according to the National Association of Realtors (NAR).

“For home shoppers and sellers, mortgage rates have been quick to adjust higher in response to expected Fed moves,” said Danielle Hale, chief economist at Realtor.com, in an emailed statement. “In the last 12 weeks alone, mortgage rates have soared more than 2 percentage points, cutting significantly into homebuyer purchasing power and likely causing shoppers to revisit their budgets.”

Where the Housing Market is Headed Into 2023

Various indicators suggest that the housing market, which reached record-high home prices earlier this year, is starting to cool. However, affordability remains out of reach for many because mortgage rates doubled just as the red-hot home prices were starting to come down.

Another factor keeping home prices elevated is the prolonged low amount of housing inventory. By the end of September, there was only a 3.2 months’ supply of homes, according to NAR. Roughly five months’ supply is considered a balanced market.

One of the reasons for the low inventory is that more borrowers are electing to stay in their homes longer to enjoy the equity gains in recent years.

“Even though home price appreciation has slowed down dramatically in recent months, homeowners have continued to build equity,” said Rick Sharga, executive vice president of market intelligence at ATTOM in an emailed press statement. “And it appears that many of those homeowners have decided to stay where they are rather than purchase a new home, and are beginning to tap into that equity.”

For people still shopping for a home and debating whether to wait until mortgage rates drop, Kristina Davis, co-owner and broker associate at RE/MAX of Cherry Creek, advises to think about the long game.

“With the higher rate, you may not be able to afford what you could a few months ago, but you can [still] get in a home and start building your real estate wealth as the value will increase over time, and you can refinance when the rates come back down,” says Davis. “You can also take the equity you will be earning and buy that dream home later.”

Hannah Jones, economic data analyst at Realtor.com, said some resourceful home shoppers are also finding success by expanding their search to more affordable cities.

“Housing demand remained strong in affordable markets as buyers focused their attention on areas that were not yet out of reach,” Jones said in a statement.

Article By: Robin Rothstein, Forbes