The housing market has experienced a significant slowdown due to soaring mortgage rates, according to recent data. Last week, Freddie Mac reported that mortgage rates reached their highest point in 21 years, with the 30-year fixed-rate mortgage averaging 7.09% for the week ending on Thursday. These rates have remained above 6.5% since May.
Data from the National Association of Realtors revealed that the home resale market experienced its slowest pace since 2010 in July. Analysts attribute this slowdown to a shortage of housing supply, leading to elevated prices. Prospective buyers are facing the dual challenge of expensive borrowing costs and persistently high listing prices, causing them to hesitate in making home purchases.
Experts predict that this situation is unlikely to change significantly in the coming months, as both home prices and mortgage rates are expected to remain at or near their current levels. Bess Freedman, CEO of real estate firm Brown Harris Stevens, compared the current market to the low-mortgage rate environment during the COVID-19 pandemic, stating that the days of easy affordability are over.
The Federal Reserve’s aggressive interest rate hikes aimed at curbing inflation have contributed to higher borrowing costs across various sectors, including car loans, credit card debt, and mortgages. In March 2022, when the first rate hike of the current series was implemented, the average 30-year fixed mortgage rate stood at just 4.45%, according to Mortgage News Daily data. Rocket Mortgage estimates that a one-percentage-point increase in mortgage rates can add thousands or even tens of thousands of dollars in additional costs per year, depending on the house price.
Lawrence Yun, chief economist at the National Association of Realtors, emphasized the impact of the Federal Reserve’s policies on the housing market, stating that buyers are reluctant to enter the market due to higher borrowing costs, while homeowners are reluctant to sell due to their relatively low mortgage rates. Yun suggested that cutting interest rates could bring down mortgage rates and potentially alleviate the logjam in the market.
In theory, high mortgage rates should lead to lower housing prices as the increased borrowing costs make homes more expensive and deter buyers. However, the scarcity of housing supply in certain regions has prevented prices from declining significantly. Gregg Coburn, a real estate professor at the University of Washington, explained that limited supply keeps prices higher than they would be in the face of higher interest rates.
Apart from economic factors, the housing market typically experiences a slowdown during the fall months due to seasonality. Orphe Divounguy, senior economist at Zillow, acknowledged this normal trend and expected the next few months to witness a slight deceleration, particularly considering the current mortgage rate levels. However, Divounguy expressed optimism about the influx of new homes expected to enter the market in the coming months, which could help rebalance supply and demand and provide relief to homebuyers.
Analysts advise prospective homebuyers to carefully evaluate their budget and urgency in light of market conditions. They emphasize that opportunities can still be found during slower periods. Bess Freedman encouraged buyers to remain proactive and consider new listings, even during a crisis, as waiting for a hotter market with lower mortgage rates may attract more buyers and increase competition.
Lawrence Yun cautioned that while more choices may become available in a low-mortgage rate market, lower interest rates tend to attract a larger number of buyers. He advised consumers not to overextend their budgets but to remain vigilant and explore any new listings that emerge, as luck may favour those without competing buyers.