Rising mortgage rates are making buying a home less affordable, but demand is still booming as people hope to make a purchase before the Federal Reserve hikes interest rates.
Mortgage rates are quickly rising in anticipation of the central bank’s action, with the average rate on a 30-year loan now at 3.92%, up from a level of 3.69% last week. The last time mortgage rates were higher was in May 2019, about a year before the pandemic struck and led the Fed to slash interest rates to near-zero levels.
Existing home sales increased 6.7% last month from December to a seasonally adjusted annual rate of 6.5 million, much more than was expected, the National Association of Realtors reported Friday.
NAR’s housing and commercial research director, Gay Cororaton, told the Washington Examiner that while it might be expected that the rising mortgage rates would dissuade demand for home-buying, because of the impending Fed hikes, buyers are trying to lock in mortgages now before they go up even more.
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“That will significantly add to the cost of a mortgage,” Cororaton said about the central bank’s impending rate hikes.
She said mortgage rates could push as high as 4.5% by the end of the year, which makes a big difference in terms of housing affordability. For instance, just a 1-percentage-point change can increase monthly mortgage rate payments by hundreds of dollars.
Desmond Lachman, a senior fellow at the American Enterprise Institute, explained that mortgage rates follow rather closely the yield on 10-year Treasury notes, which is influenced by Fed policy. At its trough during the pandemic, the Treasury 10-year rate dipped to 0.5% but has since steadily inched its way up to about 2% — near pre-pandemic levels.
“The theory is that because the Fed is so far behind the curve … they’re going to have to raise interest rates a whole lot more,” Lachman said, adding that he predicts that the Fed will have to hike rates a considerable amount, meaning that mortgage rates will go up much more, a prospect that doesn’t bode well for the housing market.
The Fed is expected to hike interest rates several times this year, although exactly how many is still unknown. Despite the likely aggressive pace and scale of the hikes, they will not result in inflation immediately dropping. That means inflation will likely remain stubbornly high throughout the year, causing even more financial strain for those who are facing higher mortgage rates.
While there is still red-hot demand for housing in the run-up to next month’s rate increase, rate hikes will likely dampen demand because people are going to be able to afford fewer houses, and the segment of the population currently rushing out to buy homes will no longer be part of the equation.
The NAR predicts that after the rate hikes, existing home sales will slow from today’s seasonally adjusted annual rate of 6.5 million to below 6 million.
While home sales and mortgage rates are up, home prices are also skyrocketing given the high demand and scarcity of homes.
The median price for a home in January was up to $350,300, a 15.4% increase from a year ago, the NAR said Friday. That rate of increase is about double what the increase in consumer prices has been across the board.
Last month, the inventory of homes available to buy also hit a record low of 860,000, a decrease of 16.5% from last year. Housing inventory is now the lowest since NAR began keeping records of the statistic more than two decades ago.
“The inventory of homes on the market remains woefully depleted,” said Lawrence Yun, NAR’s chief economist.
New homes are taking longer to build because of supply chain snags. There have been visible shortages of goods and delays in orders for goods across the board. The construction industry is trying to keep pace with high demand while also fighting to retain workers amid labor shortages.
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Lachman told the Washington Examiner that another way the housing market could be affected this year is if the economy goes into recession.
He pointed out that in addition to having house prices soaring, stock prices are also at very high levels, so if the Fed keeps raising interest rates, “you can get those bubbles bursting, and if those bubbles burst, that cannot be good for the economy.”
