Mortgage Mayhem: Rates Reach Highest Point Since 2002, Rocking Real Estate Market

A notable shake-up is underway in the real estate sector as 30-year mortgage rates experience an unexpected climb, reaching 7.09% in August 2023.

The average contract interest rate for 30-year fixed-rate mortgages, tailored for those with conforming loan balances of $726,200 or less, surged from 6.93% to 7.09%, the highest since mid-November 2022, according to the latest weekly report from the Mortgage Bankers Association (MBA) of America.

Chart: US Mortgage Rates Hit 7.09%

Federal Housing Administration (FHA) loan rates, often favored for their appeal to first-time homebuyers and those with constrained budgets due to their low down payment options, have surged to 7.02%, reaching the highest reading since 2002.

Notably, even larger loan categories are experiencing the repercussions, with jumbo loans (exceeding $726,000) peaking at 7.04%, marking the highest point in over a dozen years.

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Joel Kan, vice president and deputy chief economist at MBA, provided insight into the driving forces behind this rate surge. He attributes it to a dual catalyst – the unveiling of the Treasury’s funding plan and a subsequent downgrade in the U.S. government debt rating.

Mortgage rates are echoing the trajectory of the surging Treasury yields. The yield on a 30-year Treasury bond has surged from 4% to 4.20% since the start of the month, briefly revisiting levels last seen in November 2022.

Mortgage Applications Continue To Dip: Real Estate Stocks Follow Suit

During the first week of August 2023, mortgage applications across the United States plunged by 3.1%, marking the third consecutive decline.

The decline is reflected in refinancing applications, which saw a 4% downturn, and home purchase applications, which experienced a 2.7% dip.

The combined influence of escalating interest rates and restrained demand for new mortgages is adding pressure on real estate stocks.

The Real Estate Select Sector SPDR Fund XLRE, which holds 34 different industry players, has weathered a 4.7% drop since its peak on July 28. A similar narrative echoes in the Vanguard Real Estate ETF VNQ, mirroring the decline with a 4% retreat.

Companies like Host Hotels & Resorts, Inc. HST and Extra Space Storage, Inc. EXR emerged as the weakest performers, falling 9% and 6%, respectively, over the past week.

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