Mortgage rates drop for third week in a row, but home buyers remain reluctant
There’s good and bad news for mortgage rates this week. The good news is rates have continued their slow downward trend, averaging 6.87% on 30-year, fixed-rate mortgages, Freddie Mac reported.
Although this is promising, lowering interest rates is far from the norm. Last week, 30-year mortgages had average rates of 6.95%. However, compared to a year ago when rates averaged 6.67%, this week and last week’s rates are still relatively high. Still, any improvement is better than nothing.
"Mortgage rates fell for the third straight week following signs of cooling inflation and market expectations of a future Fed rate cut," Freddie Mac Chief Economist Sam Khater explained. "These lower mortgage rates coupled with the gradually improving housing supply bodes well for the housing market. Aspiring homeowners should remember it’s important to shop around for the best mortgage rate as they can vary widely between lenders."
On top of 30-year rates, 15-year mortgage rates also dipped this week, but still remain above the 6% mark. Interest rates for 15-year fixed-rate mortgages averaged 6.13%, down slightly from last week when they averaged 6.17%.
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Down payment requirements are increasing across the country for the average prospective homebuyer. Households making a middle class income must put down $127,750 on an average priced home to realistically afford the monthly payments, according to a Zillow study.
This down payment is equivalent to about 35.4% of a $360,000 dollar home, which is the price of a typical U.S. home. A down payment of this size helps buyers pay no more than 30% of their income on mortgage payments.
Just five years ago, many households could afford monthly mortgage payments without paying any down payment for their new home.
"Down payments have always been important, but even more so today," Zillow Chief Economist Skylar Olsen said. "With so few available, buyers may have to wait even longer for the right home to hit the market, especially now that buyers can afford less. Mortgage rate movements during that time could make the difference between affording that home and not."
To save up the necessary down payment, it would take many households making a median income, 12 years to save. This assumes putting 10% of their income aside — an unlikely reality for many facing skyrocketing costs in all areas of their lives.
"Saving enough is a tall task without outside help — a gift from family or perhaps a stock windfall," Olsen said. "To make the finances work, some folks are making a big move across the country, co-buying or buying a home with an extra room to rent out. Down payment assistance is another great resource that is too often overlooked."
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Interest may be lower to a small degree, but prospective buyers don’t seem to be ready to dive back into the buying market. Fannie Mae’s Home Purchase Sentiment Index dropped 2.5 points in May to 69.4, signaling that buyers don’t have positive attitudes about buying at the moment.
This drop puts the index at an all-time low. In May, only 14% of consumers believed it's a good time to buy a new home, down from 20% in April. Consumers still think affordability will remain difficult for most buyers, at least for the foreseeable future.
"Consumer sentiment toward housing declined from its recent plateau, as an increasing share of consumers struggle to find the positives in the current housing market," said Doug Duncan, Fannie Mae senior vice president and chief economist. "While many respondents expressed optimism at the beginning of the year that mortgage rates would decline, that simply hasn’t happened, and current sentiment reflects pent-up frustration with the overall lack of purchase affordability.
"This is most clearly evidenced by our ‘good time to buy’ component falling to a new survey low this month. On the other hand, homeowners’ perception of home-selling conditions declined only slightly and remains largely positive after a steady increase over the last few months," Duncan said.
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