Homebuyers should expect their financial pain to worsen in the coming months.
Mortgage interest rates are expected to keep rising, likely surpassing 6%, in response to stubbornly high inflation. This could accelerate the housing market correction, which is already well underway, by making purchasing a home even more expensive for cash-strapped buyers, pricing many completely out of the market.
The consumer price index, a federal government measure of inflation, was up 8.3% in August compared with a year ago, according to the Bureau of Labor Statistics report released on Tuesday. Inflation fell from an 8.5% year-over-year increase in July and 9.1% in August. Yet it’s not enough of a drop to prevent the U.S. Federal Reserve from continuing to hammer the economy. And the Fed’s actions are likely to push mortgage rates up even higher.
The Fed is expected to hike its short-term interest rates at its meeting next week. Mortgage interest rates are separate but typically follow the same trajectory as the Fed’s rates. So when the Fed jacks up its rates in an effort to make borrowing money more expensive and weaken demand for products and services, mortgage rates generally tick up as well.
Many experts anticipate mortgage rates will cross the 6% threshold by the end of the year—if not sooner.
“Higher mortgage rates combined with still-high home prices are making it challenging for homebuyers as we head into what historically has been the best time of the year to find a better deal,” says Realtor.com Senior Economist George Ratiu. “Something has to give.”
Mortgage rates have more than doubled in the past year, going from an average 2.88% this time last year to 5.89% in the week ending Sept. 8, according to Freddie Mac. (This is for 30-year fixed-rate loans.) Just this increase coupled with higher prices makes the median monthly mortgage payment nearly two-thirds, 63%, more expensive than the same time a year ago and more than three-quarters, 78%, more expensive more than two years ago.
However, most buyers haven’t seen their salaries go up 78% over the same two-year span.
“Volatility is still going to be the name of the game,” says Lisa Sturtevant, chief economist of the Bright MLS The multiple listing service covers the mid-Atlantic region. Where investors park their money will also influence rates as will lenders competing for customers.
“While we focus on the Federal Reserve’s rate hikes … there are so many other factors that influence mortgage rates,” adds Sturtevant. “And many are moving in different directions.”
The number of home sales is also expected to keep declining as rates reach even higher.
“For a while, we were seeing buyers leaving the market because they couldn’t find anything to buy,” says Sturtevant. “But now there are buyers who can’t make the numbers work anymore.”
Ratiu expects that prices will “have to adjust” given buyers’ budgets being stretched so thin. A single percentage point increase in mortgage rates can result in buyers paying hundreds of dollars more a month on a home—and tens of thousands over the course of a 30-year loan.
“The important thing to remember is that we are in a transition period where prices are likely to continue rebalancing,” says Ratiu. “Prices won’t outright decline year over year this year. However, we might see prices begin to decline in 2023.”
Meanwhile, some economists like Sturtevant don’t anticipate home prices will actually drop—except in smaller real estate markets, vacation areas, and places where prices rose by the most at a breakneck pace, such as Austin, TX, and Boise, ID. She’s convinced the demand for housing is just so great at a time when the shortage of homes available for rent and sale is too significant for prices to fall across the board in a meaningful way.
Instead, she expects prices to flatten out.
“We have to live somewhere, and rents aren’t softening much either,” says Sturtevant.
The housing market’s fate isn’t just tied to mortgage rates. The more the Fed hikes rates, the more likely a recession appears. Higher rates mean businesses pay more to borrow money to expand operations and hire and the less consumers spend, shrinking company profits.
If people are worried about the stability of their jobs, they’re less likely to buy a home, often the largest financial purchase of their lives. That could cause prices to come down even more.
“The likelihood of a recession with significant job losses is on the table,” says Ratiu. If “people … feel less confident buying homes, [that] will generate a downward spiral, which could put housing in a nosedive.”
However, with unemployment so low, the nation may narrowly avoid a recession, achieving the Fed’s goal of a “soft landing.”
“We have wage growth, we have historically low unemployment, we have more jobs than we have to fill them,” says Sturtevant. “The pendulum would have to swing dramatically to shift to a situation where we see significant job losses.”