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Mortgage rates continue to rise, and some lenders are already quoting certain home buyers rates of over 8%, mortgage experts say.
As the 10-year Treasury
BX:TMUBMUSD10Y
inched over 4.8% on Tuesday, the highest yield since August 2007 according to Dow Jones Market Data, mortgage rates have in turn surged. Rates closely follow the 10-year note.
The 30-year mortgage rate is at the highest level in 23 years, at 7.72% as of Oct. 3, according to Mortgage News Daily.
But some buyers are already seeing 8% mortgage rates, lenders tell MarketWatch.
“For a number of buyers, mortgage rates have already crossed the 8% threshold,” Melissa Cohn, regional vice president of William Raveis Mortgage, said.
“‘Considering that rates were at 3% less than two years ago, rates over 8% will give more potential buyers a reason to pause.’”
These are buyers with high loan-to-value loans, high balance-conforming loans, as well as most non-qualified mortgage loans in the market today, Cohn added. (Non-qualified mortgage loans don’t have to adhere to Federal Housing Administration, USDA or Veteran Affairs rules issued by Freddie Mac
FMCC,
and Fannie Mae
FNMA,
)
These could also be borrowers with lower credit scores, or non-prime borrowers, John Toohig, head of whole loan trading at Raymond James, told MarketWatch.
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,” Toohig added.
“Non-prime people can be divided into many different categories: young, limited credit experience, bad credit history, variable- and difficult-to-document income, those who had single major credit problems (usually driven by a medical problem or a divorce),” non-profit group Brookings Institute says.
Why are rates rising?
Rates are rising as more economic indicators point to a strong U.S. economy.
Earlier on Tuesday, job openings rose to 9.6 million, reflecting a healthy appetite for workers in a steadily growing U.S. economy. Job listings rebounded from a revised 8.9 million in July, which was the lowest level in almost two and a half years, the Labor Department said.
Good news about the resilience of the U.S. economy is processed as bad news for the mortgage industry, however, as it “adds fuel to the Fed to raise rates again this year, and to keep rates higher for longer and longer,” Cohn said.
What happens at 8%?
Hitting 8% will be like crossing a psychological barrier, Toohig said, but he also noted that when rates broke 7% earlier in the year, that too was a significant milestone for buyers.
Higher rates equate to hundreds of dollars per month in extra borrowing costs for buyers. That not only reduces their budget, but it also puts a heavier burden on the buyer to tap their income to finance their home purchase.
“Mortgage debt is now over 40% of the consumer wallet. That’s a high number with inflation, and everything that goes along with it — 8% only makes that math worse,” Toohig said.
And that will hurt home-buying demand further, Cohn added.
“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,” she added. “The higher the rate, the higher the payment. At today’s rates, even a drop to 7% may be enough to get some buyers back in the game.”
When will rates fall?
Only after the Fed signals that it’s done hiking rates and the data indicate a slowing economy, including a weakening job market, will rates inch down, experts said.
“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,” Toohig said.
Toohig said that unless the U.S. economy shows signs of cooling off, rates are likely to stay high for the time being.
“All eyes are just going to be on when that first cut is going to come and, with each good jobs number, it pushes that cut another quarter out,” he added.
