Mortgage rates have hit the highest level since 2006

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At the same time, lenders are raising qualification standards

This month has produced no relief for the declining number of people who are considering the purchase of a home. While it’s true that prices have softened a bit, mortgage rates rose to their highest level since 2006 last week.

In its weekly update, the Mortgage Bankers Association (MBA) reported a 2% drop in mortgage applications in just one week. Rising mortgage rates are likely the reason.

“Mortgage rates moved higher once again during the first week of the fourth quarter of 2022, with the 30-year conforming rate reaching 6.81%, the highest level since 2006,” said Mike Fratantoni, MBA’s senior vice president and chief economist. 

In fact, mortgage rates increased across all product types in MBA’s survey, with the largest, a 20-basis-point increase, for 5-year ARM loans. Adjustable rate mortgages (ARM) have suddenly become more popular because the initial rate is typically lower than the rate on a fixed rate mortgage. The downside is lenders can raise the rate at specific periods over the life of the loan.

Tougher qualification standards

Not only are rising mortgage rates pressing would-be buyers, but it’s also now harder to qualify for a mortgage. Joel Kan, MBA’s associate vice president of Economic and Industry Forecasting, says lenders are making less money available for mortgages and have become more choosy over who gets it.

“With the likelihood of a weakening economy, which would lead to an increase in delinquencies, there was a smaller appetite for lower credit score and high LTV (loan to value) loan programs, along with a reduction in government streamline refinance programs,” Kan said. “As mortgage rates have more than doubled over the past year, resulting in a drop in refinance activity, lenders have worked to reduce excess capacity and costs by eliminating underutilized loan programs.”

Kan also said the government credit availability index has declined in seven of the last eight months to its lowest level since April 2013.

With fewer people able to purchase homes, more have to continue renting. That has pushed average rent prices to record levels this year and has been one of the largest contributors to inflation.

When the Bureau of Labor Statistics releases the September Consumer Price Index (CPI), many economists expect that the data will show that trend is continuing.

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