Mortgage Rates Down Slightly While Lenders Reject Home Loans In Flood Risk Areas

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This week, mortgage rates dipped slightly while mortgage applications reached a quarter-century low and mortgage denials saw an uptick for properties in areas with elevated flood risks.

On the Mortgage Front

Freddie Mac (OTCMKTS:FMCC) reported the 30-year fixed-rate mortgage averaged 6.66% as of Oct. 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 adjustable-rate mortgage averaged 5.36%, up from last week when it averaged 5.30%.

“Mortgage rates decreased slightly this week due to ongoing economic uncertainty,” said Sam Khater, Freddie Mac’s chief economist. “However, rates remain quite high compared to just one year ago, meaning housing continues to be more expensive for potential homebuyers.”

While mortgage rates were down slightly after having reached their highest level in 16 years, mortgage applications fell to their lowest level in 25 years. The Mortgage Bankers Association’s (MBA) Market Composite Index dropped by 14.2% for the week ending Sept. 30.

The Purchase Index was down 13% from the previous week while the Refinance Index decreased by 18% and was also 86% lower than the same week one year ago.

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

The steep increase in rates continued to halt refinance activity and is also impacting purchase applications, which have fallen 37% behind last year’s pace. There was also an impact from Hurricane Ian’s arrival in Florida last week, which prompted widespread closings and evacuations. Applications in Florida fell 31%, compared to 14% overall, on a non-seasonally adjusted basis.”

And speaking of wild weather, a new analysis by Zillow (NASDAQ:ZG) and ClimateCheck found areas with increased flood risks are also reporting an increase in mortgage denials and in would-be borrowers withdrawing their mortgage applications, even after controlling for income and property value.

But being in an area with a high flood risk is not scaring 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 higher costs of a home and necessary insurance in order to own waterside property.

“The higher rates of mortgage application 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 Zillow Senior Economist Nicole Bachaud.

“Living around desirable coasts and other bodies of water, which tend to be more flood-prone areas, will continue to be a draw for home buyers, but more and more are considering the additional risk. We have not yet seen other types of climate risk make a dent in homebuying practices, so there is a lot of room left for change and continued education.”

But even without a wrathful Mother Nature, homebuyers are forced to deal with increased costs. A new study by Redfin (NASDAQ:RDFN) found the typical homebuyer who took out a mortgage in July made a $62,500 down payment, up 13.6% from a year earlier and almost twice the median $32,917 down payment in pre-pandemic July 2019.

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

“Homebuyers don’t need to make enormous down payments anymore because they’re much less likely to encounter bidding wars now that so many Americans have bowed out of the market,” said Redfin Senior Economist Sheharyar Bokhari. “And many buyers can no longer afford to put down 15% or 20% of the purchase prices.

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 everyday expenses. That, along with the slumping stock market, is cutting into down-payment budgets.”

On the Homebuying Front

A new survey conducted by Personal Capital and Morning Consult a growing number of Americans stating the rising cost of real estate was more worrisome than a recession – with one in four people saying they’ve decided to delay purchasing a home indefinitely.

And while three in four Americans said they considered homeownership as part of building wealth, 43% of respondents to the new survey said it was “one of several ways to build wealth.”

“There are few ways to circumvent the impact of higher interest rates on your mortgage bill, but one option is to put down an even bigger down payment than you were planning,” according to J.J. Lester, a certified financial planner and a real estate specialist at Personal Capital.

“As part of this process, consider your other investments and cash reserves. There are several strategies to build long-term wealth. If buying a home means you won’t be able to build your emergency savings or will have to pause contributions to your 401(K), you might want to consider putting your plans on hold.”

The new survey was conducted Sept. 1-6 among a national sample of 2,210 adults.

Separately, the U.S. Department of Housing and Urban Development (HUD) released a report that highlighted the challenges facing buyers interested in lower-priced homes.

“By continuing to examine ways in which we can better support small-mortgage lending, we can take important steps to ensure equal access to credit for borrowers seeking to purchase lower-priced homes, putting the dream of homeownership within reach for many more families,” said Solomon Greene, Principal Deputy Assistant Secretary for Policy Development and Research at HUD.

The report, titled “Financing Lower-Priced Homes: Small Mortgage Loans,” found mortgage loans with an original principal obligation of $70,000 or less accounted for less than 3.5% of home purchase originations in 2020.

Many of the low balance mortgage loans that 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 mortgage lending are fixed costs of loan origination and servicing, which makes smaller loans less profitable and may require additional incentivization for lenders.

This article originally appeared on ValueWalk

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