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Mortgage Rate Volatility Returns Amid Market Seasonal Slowdown

Mortgage Rate Volatility Returns Amid Market Seasonal Slowdown

In 2023, the U.S. housing market stabilized across various regions after experiencing a minor price correction in the latter half of 2022. Several factors contributed to this equilibrium, including mortgage rates falling below 6.5%, limited inventory of available homes, and increased demand during the spring months.

However, as the housing market prepares for the traditionally slow fall and winter period, real estate professionals are closely monitoring the reemergence of a familiar threat: 7% mortgage rates.

On Tuesday, the average 30-year fixed mortgage rate rose to 7.13%, a significant contrast to the lower rates seen in February. This jump in rates brings them close to the peak of 7.37% observed last October.

Considering current house prices and income levels, researchers at the Federal Reserve Bank of Atlanta estimate that affordability reaches levels comparable to the peak of the housing bubble when mortgage rates approach the 7% range.

The sudden return of 7% mortgage rates raises an important question for the housing market: Will we see a resumption of monthly home price declines, especially during the traditionally slower fall and winter months? After a 5.1% decrease in U.S. home prices between June 2022 and January 2023, the Case-Shiller National Home Price Index rebounded with a strong 4.2% surge from February to May 2023.

Housing economists have differing opinions on whether the recent increase in mortgage rates puts the housing market at risk for further price declines. Some economists at firms like Morgan Stanley, Moody’s Analytics, and Freddie Mac predict that national house prices will decline enough in the second half of 2023 to offset the gains made in the first half of the year. Property economists at Capital Economics also anticipate a resumption of month-over-month house price declines.

Housing experts from the AEI Housing Center, Zillow, and CoreLogic are of the opinion that U.S. home prices have hit their lowest point. They believe that the scarcity of available homes for sale, which was 49.7% lower in June 2023 compared to June 2019, will prevent further declines in house prices, even if mortgage rates remain high for an extended period.

Despite the significant deterioration in housing affordability, economists at the AEI Housing Center suggest considering the strong labor market, which currently boasts an impressively low unemployment rate of 3.6%. This robust labor market acts as a support for the overall growth of national home prices.

However, it’s important to note that when institutions such as Morgan Stanley or CoreLogic refer to “U.S. home prices,” they are speaking in terms of a national average. On a regional level, there may be variations in these trends, with certain overheated markets like Austin experiencing ongoing price drops, while relatively more affordable markets like Scranton continue to see incremental increases.

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