Mortgage rates drop slightly as lenders reject home loans in flood risk areas

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This week, mortgage rates fell slightly as mortgage applications hit a quarter-century low and mortgage denials rose for properties in high flood risk areas.

On the mortgage front

Freddie Mac (OTCMKTS:FMCC) reported that the 30-year fixed rate mortgage averaged 6.66% as of October 6, down from last week when it averaged 6.70%.

The 15-year fixed rate mortgage averaged 5.90%, down from last week when it averaged 5.96%. And the 5-year Treasury-indexed hybrid variable rate mortgage averaged 5.36%, up from last week when it averaged 5.30%.

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“Mortgage rates have come down slightly this week due to continued economic uncertainty,” said Sam Khater, chief economist at Freddie Mac. “However, rates remain quite high compared to just a year ago, which means housing continues to be more expensive for potential buyers.”

While mortgage rates fell slightly from a 16-year high, mortgage applications fell to a 25-year low. The Mortgage Bankers Association (MBA) composite market index fell 14.2% for the week ending September 30.

The buy index was down 13% from the previous week, while the refinance index was down 18% and was also 86% lower than the same week a year ago.

Joel Kan, associate vice president of economic and industry forecasting at the MBA, observed: “The 30-year fixed rate reached 6.75% last week – the highest rate since 2006. The current rate has more than doubled over the past year and has grown 130% from base. points in the past seven weeks alone.

The sharp rise in rates continued to dampen refinancing activity and also impacted purchase requests, which fell 37% compared to last year. There was also an impact from the landfall of Hurricane Ian in Florida last week, which caused widespread closures and evacuations. Applications in Florida fell 31%, compared to 14% overall, on an unadjusted basis. »

And speaking of wild weather, new analysis from Zillow (NASDAQ:ZG) and ClimateCheck found that areas with increased flood risk are also reporting an increase in mortgage denials and potential borrowers withdrawing their mortgage applications. , even after controlling for income and property. assess.

But being in a high-risk flood zone doesn’t scare away buyers. According to this analysis, homes in areas with higher flood risk continue to appreciate faster than in other areas – clearly there are still plenty of buyers willing to accept that risk and pay the costs. higher than a home and the insurance needed to own the waterfront. property.

“Higher rates of mortgage denials and withdrawals in high flood risk areas are an encouraging signal that buyers and lenders are more often including flood risk in their decision-making,” said Nicole Bachaud, senior economist at Zillow.

“Living around coastlines and other desirable bodies of water, which tend to be more flood-prone areas, will continue to appeal to homebuyers, but more and more are considering the added risk. haven’t yet seen other types of climate likely to dent home buying practices, so there’s plenty of room for change and ongoing learning.”

But even without a wrathful Mother Nature, homebuyers are forced to deal with increased costs. New research from Redfin (NASDAQ:RDFN) found that the typical homebuyer who took out a mortgage in July paid a down payment of $62,500, up 13.6% from a year earlier. and nearly double the median down payment of $32,917 in July 2019 before the pandemic.

The typical buyer’s down payment in July was 15.2% of the purchase price, essentially unchanged from 15% a year earlier, but up from 10% before the pandemic. But there is good news – the cooling housing market has seen down payment levels drop slightly since they peaked at $66,000 in May and June.

“Homebuyers no longer need to make huge down payments because they are much less likely to encounter bidding wars now that so many Americans have pulled out of the market,” said Sheharyar Bokhari, senior economist at Redfin. “And many buyers can no longer afford to lower the purchase price by 15% or 20%.

Between higher mortgage rates creating higher monthly housing payments and inflation pushing up the prices of everything from food to fuel, buyers need to set aside more money for day-to-day expenses. This, combined with the stock market crash, is reducing down payment budgets.

On the frontline of buying a house

A new survey by Personal Capital and Morning Consult of a growing number of Americans saying the rising cost of housing is more worrying than a recession – with one in four saying they have decided to delay the economy indefinitely. buying a house.

And while three in four Americans said they view home ownership as part of building wealth, 43% of respondents to the new survey said it was “one of many ways to create wealth”.

“There are few ways to get around the impact of higher interest rates on your mortgage bill, but one option is to put down an even bigger down payment than you planned,” says JJ Lester, Financial Planner licensed and real estate specialist. at Personal Capital.

“As part of this process, consider your other investments and cash reserves. There are several strategies for building long-term wealth. If buying a home means you won’t be able to build your savings emergency or need to suspend contributions to your 401(K), you may want to consider suspending your plans.”

The new survey was conducted from September 1 to 6 among a national sample of 2,210 adults.

Separately, the US Department of Housing and Urban Development (HUD) released a report that highlighted the challenges faced by buyers interested in low-cost homes.

“By continuing to examine ways to better support small mortgages, we can take important steps to ensure equal access to credit for borrowers looking to buy homes at low prices, putting the dream of homeownership homeownership within the reach of many more families,” said Solomon Greene, principal assistant assistant secretary for policy development and research at HUD.

The report, titled “Financing Low-Cost Homes: Small Mortgages,” found that mortgages with an initial principal obligation of $70,000 or less accounted for less than 3.5% of home purchases in 2020.

Many of the low-balance mortgages secured properties valued at more than $70,000, which HUD said was an indication that the purchases included substantial down payments.

HUD also determined that a “significant barrier” to small mortgages are the fixed costs of originating and servicing loans, which makes small loans less profitable and may require additional incentive for lenders.

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