What do mortgage rates over 7% mean for the housing market?

Washington, DC
CNN
–

The already unaffordable housing market is getting more expensive.

As mortgage rates top 7% — their highest in 21 years according to Freddie Mac — homebuyers are facing bloated costs. Some housing experts warn that prices could continue to rise around 8%.

What does this mean for home hunters? Even ever-optimistic real estate professionals say that buyers and sellers should adjust their expectations.

“I don’t like to be ‘doom and gloom,'” said Bess Friedman, CEO of Brown Harris Stevens, a national real estate firm. “I keep saying that real estate is the best long-term investment. But there has been a shift. It is wrong for people to assume that just because inflation is starting to move in the right direction, mortgage rates will also go down.”

Friedman said that despite recent reports that inflation is slowing, it’s still too high and the economy is too hot — and for the housing market, that’s not good.

“The fact that we’re seeing rates at these high levels has an impact on the housing market,” Friedman said. “Prices have doubled. Stock is restricted. Prices are still high. Those three things create a slow housing economy.”

There’s little to suggest much of that will change in the near term, Friedman said, given the Fed’s continued concerns about inflation, which puts a rate hike back on the table.

Could rates go up? Friedman said. “I don’t see any incentive for them to back off. Because of that, people have to stick around interest rates now.”

As 30-year fixed-rate mortgage rates have risen over the past 31 months – up from a weekly low of 2.65% in January 2021 according to Freddie Mac – the payment by a homebuyer for a median-priced home putting 20% ​​down has gone up. More than $1,200 a month. This has pushed home buying out of the reach of many people.

Buyers who are still in the market find historically low inventory available.

Because mortgage rates have been so low during the pandemic, with people buying or refinancing loans at 2% or 3%, there is little incentive for them to buy and sell another home at 6%, 7% or higher.

And because of the low inventory, prices have remained high. Average home prices reached their second all-time high in June. At $410,200, it was just 0.9% below its all-time high of $413,800 just the year before.

“We are at a critical juncture,” Lawrence Yoon, chief economist for the National Association of Realtors, wrote in a blog post. post online Thursday.

Minutes of the Fed’s last meeting, which were released this week, revealed lingering concerns about inflation if the economy and labor markets do not calm down, indicating the possibility of another rate hike during the three remaining meetings this year.

That, along with Fitch’s downgrade of US debt, has put upward pressure on long-term borrowing rates, Yoon said.

This week, the yield on the 10-year US Treasury crossed the 4.2% threshold from which it was rising to 4.3% on Thursday, its highest level in more than a decade. This is a turning point, according to Yun.

“If it gets past that momentum, however irrational, could push it up about 5%,” he wrote. “This is bad news for mortgage rates, which may correspondingly rise to 8%,” he said.

At the current average mortgage rate of 7.09%, the buyer of a median home priced $410,200 would pay $2,203 per month in principal and interest, according to the calculation using Freddie Mac’s tool. In January 2021, when the median home price was down nearly $100,000 at $309,900, and interest rates fell more than 4 percentage points at 2.65%, home buyers locked in $999 in monthly payments.

“Increasing the mortgage rate is exacerbating housing affordability as housing prices rise in this tight inventory environment,” said Jessica Lutz, NAR’s deputy chief economist. “Something has to give in order for interest rates to come down, and that’s something that’s the Fed’s next decision.”

This wasn’t where forecasters thought we’d be, said Melissa Kuhn, regional vice president at William Raveis Mortgage.

“We thought mortgage rates would be much lower now,” she said. All of these Fed hikes were meant to slow inflation down more quickly. But the economy has defied rising interest rates.”

Federal Reserve officials raised interest rates to the highest level in 22 years. And although the Fed does not directly set the interest rates that mortgage borrowers pay, its actions do affect them. Mortgage rates tend to track the yield on the 10-year US Treasury note, which moves based on a mix of anticipation about Fed action, what the Fed is actually doing and investor reaction. When Treasury yields rise, so do mortgage rates.

Cohn said that the market is determining the likelihood of another rate hike, and there is a fair amount of risk in the economy at this point. Lenders take note of this risk, which makes interest rates higher.

“The banks are protecting themselves,” she said. “Banks are trying to protect their bottom line.”

Unfortunately for homebuyers, prices can go up, Cohn said, and he expects them to stay high.

She said that the consumer continues to spend and employment continues.

“Inflation will only really go down when people spend less money and there are fewer jobs,” Cohn said. “As long as the employment situation remains as strong as it is, it will be difficult to bring inflation down continuously.”

The Fed will hold three more rate-setting meetings this year, in September, November and December.

“The rest of the year we’ll have to wait and see what the Fed does,” Cohn said. “I don’t see any real relief until next year.”