San Jose, California – Mortgage rates have surged in recent days, reaching an average of 7.03% for a 30-year fixed loan, up from 6.97% just a week earlier. This increase in mortgage rates comes as hopes of the Federal Reserve cutting rates by the spring buying season have diminished, as inflation levels remain higher than anticipated. The Mortgage News Daily index reported that rates peaked at 7.13% on Feb. 13, and have been steadily increasing over the last seven days.
Freddie Mac’s latest release also showed a similar rise in borrowing costs, with the average 30-year mortgage rate climbing to 6.77% from 6.64% a week earlier. With inflation surpassing economists’ expectations in January, the US Consumer Price Index (CPI) gained another 0.3% month over month and grew 3.1% annually. This has led to concerns that the Federal Reserve’s fight with inflation will last longer than previously thought, impacting homebuying affordability.
The surge in mortgage rates has led to a retreat of homebuyers from the market, with the volume of mortgage applications dropping more than 2% from the previous week. As a result, the purchase activity portion of the Mortgage Bankers Association index showed a weekly decrease of 3%, remaining 12% lower than the same week one year ago. This reluctance in homebuying is also influenced by the fact that renting is proving to be a cheaper option than paying a mortgage in most parts of the country.
According to a study by LendingTree, rent was cheaper than owning a house with a mortgage in each of the nation’s 50 largest metros in 2022, with the price difference between the two amounting to nearly $570 per month on a median-priced home. The rising cost of both renting and buying homes has left many potential buyers priced out of the market, leading them to opt for renting instead. This has contributed to an increase in average national rent, which rose 1.1% on a year-over-year basis in January to $1,964, as reported by Redfin’s rental tracker.
The significant spread between owning and renting in cities such as San Jose, California, San Francisco, and New York, with mortgages ranging between $3,000 and $4,000 and rents falling between $1,700 and $2,600, further emphasizes the financial challenges faced by potential homebuyers. In contrast, cities like Phoenix, Orlando, Jacksonville, Fla., and Atlanta show a much smaller cost spread between owning and renting.
As mortgage rates continue to rise and affordability challenges persist, many homebuyers are left with no choice but to opt for renting. This trend has significant implications for the housing market, as the dream of homeownership becomes increasingly out of reach for a growing number of aspiring buyers.