Impact of Rising Mortgage Rates on the Increasing Cost of Housing

The surging mortgage rates, currently at 7% – the highest in 21 years, as indicated by Freddie Mac’s report, are contributing to the already exorbitant housing market. With experts predicting a potential climb towards 8%, homebuyers are grappling with soaring costs, necessitating a recalibration of expectations for buyers and sellers alike.

Bess Freedman, CEO of the national real estate firm Brown Harris Stevens, acknowledges the shift in the market while emphasizing real estate’s enduring status as a sound long-term investment. However, Freedman cautions against the assumption that rising inflation automatically translates to a decline in mortgage rates. The high inflation coupled with a strong economy has adversely impacted the housing market by driving up rates, exacerbating inventory shortages, and perpetuating elevated prices. These factors collectively contribute to a sluggish housing economy.

Unfortunately, prospects for improvement remain limited in the near term, given the Federal Reserve’s ongoing concerns about inflation. Considering these circumstances, Freedman highlights the need for a realistic perspective on current interest rates, as any potential catalyst for a decrease is not apparent.

The consequences of escalating rates are tangible, with the payment for a median-priced home, where the buyer has put down a 20% deposit, increasing by over $1,200 per month during the past 31 months. This significant rise in costs has made homeownership unattainable for many individuals.

Moreover, homebuyers still in the market are encountering historically low levels of available inventory. Due to the record-low mortgage rates prevalent throughout the pandemic, homeowners lack the incentive to sell and purchase another property at a significantly higher interest rate. As a result, the insufficient inventory perpetuates heightened prices, with median home prices in June closely trailing the all-time high set the previous year, standing at $410,200, a mere 0.9% lower than the peak of $413,800.

In summary, the housing market continues to grapple with mounting challenges caused by rising mortgage rates, constrained inventory, and persistent price elevation. With limited indications of immediate improvement, buyers and sellers face the necessity to adapt to the current scenario and its impact on the market.

“We are currently facing a pivotal moment,” stated Lawrence Yun, the chief economist for the National Association of Realtors, in a recent online post. The release of minutes from the latest Federal Reserve meeting this week highlighted ongoing concerns about inflation. If the economy and labor markets do not cool down, there may be another rate hike during the remaining three meetings this year. Alongside this, Fitch’s downgrade of US debt has placed upward pressure on longer-term borrowing rates, according to Yun.

This week, the yield on 10-year US Treasuries surpassed the threshold of 4.2% and reached 4.3% on Thursday, marking its highest level in over a decade. Yun considers this a tipping point. He wrote, “If it surpasses this mark, then the momentum, no matter how irrational, could push it toward 5%. That’s bad news for mortgage rates, which may consequently rise to 8%.” Currently, the average mortgage rate is 7.09%. For a buyer of a median-priced $410,200 home, this translates to a monthly payment of $2,203 in principal and interest. In January 2021, when the median home price was approximately $100,000 lower at $309,900 and interest rates were over 4 percentage points lower at 2.65%, a home buyer would have locked into $999 monthly payments.

“The increased mortgage rate is further exacerbating housing affordability issues as home prices continue to rise in this limited inventory environment,” explained Jessica Lautz, deputy chief economist at NAR. “For rates to come down, something needs to change, and that something is the next decision from the Fed.”

Melissa Cohn, regional vice president at William Raveis Mortgage, stated, “We anticipated that mortgage rates would be considerably lower by now. These Fed rate hikes were intended to more swiftly control inflation. However, the economy has defied the rate hikes.”

Federal Reserve officials have lifted interest rates to the highest level in 22 years. While the Fed does not directly set the interest rates borrowers pay on mortgages, it does influence them. Mortgage rates tend to follow the yield on 10-year US Treasuries, which are affected by anticipated and actual actions by the Fed, as well as investor reactions. When Treasury yields rise, so do mortgage rates.

The current market conditions anticipate the potential for another rate hike, as stated by Cohn. Presently, there is a notable level of economic risk to consider. This risk has influenced lenders to maintain higher interest rates.

Cohn expressed, “Banks are actively safeguarding their financial performance. They are conscientiously preserving their bottom line.”

Regrettably, home buyers may face the prospect of further increases in rates, with expectations of rates remaining elevated. As Cohn emphasized, the consumer spending and hiring trends persist.

Cohn remarked, “Inflation will only diminish significantly when there is a reduction in spending and a decline in job opportunities. As long as the current employment situation remains robust, consistently lowering inflation will pose a challenge.”

The Federal Reserve has scheduled three more rate-setting meetings for this year: September, November, and December.

Cohn concluded, “For the remainder of the year, we will closely monitor the actions of the Fed. Genuine relief may not materialize until the following year.”