Are Rising Mortgage Rates Affecting the Housing Market?
As U.S. Home sales continue to heat up this spring, the highest mortgage rates in over a decade may act as a counterweight to the buying frenzy that has gripped the market.
Home sales surged in 2021 to a fifteen-year high (the highest level since 2006). The fascinating aspect to this is that while record low inventory has pushed many prospective buyers out of the market, intense demand has nevertheless kept sales at historically high levels.
But now, with borrowing costs reaching 5% for the first time since 2011, homes may be getting too expensive for millions of more folks, which should serve to temper the recent price rises.
“We’ve never seen a time where mortgage rates have risen so quickly as they have and the market hasn’t cooled off,” said Ralph McLaughlin, chief economist at Kukun, a real estate data firm. But as the new high rates set in, McLaughlin adds, “I don’t expect the market to collapse, by any means, but certainly it’s going to go from gangbuster to one that hopefully looks normal.”
While the spring is the peek home buying season, this year seems less competitive than last spring when homes were grabbed up in record time periods once being put on the market, heavily due to historically low mortgage rates.
The speed with which mortgage rates are rising is the fastest in 35 years, making home prices far more expensive than even a few months ago. As a matter of fact, just a few months ago (January) rates for a 30-year fixed mortgage were at 3.22%; now those rates, as mentioned above, are at 5%.
To be more specific, Lending Tree (an online loan platform) reports that a 5% rate on a $300,000 loan would create a monthly payment of $1,610. At 3.04%, where that 30-year rate was a year ago, the monthly payment on that same loan would be $1,271.
As depicted above, while this increase alone can add hundreds of dollars to monthly mortgage payments, buyers are also keenly aware that inflation has driven many other homeowner costs higher, such as heating, electric, repair bills, etc.
In a survey by Fannie Mae last month, less than a quarter of consumers said it was a good time to buy a home, down significantly from 53% a year earlier.
Yet, many real estate brokers say a decrease in buyer activity in coming months would only moderately cool the market. Part of the reasoning stems from the fact that about 25% of homes bought in February of this year, were bought for cash according to the National Association of Realtors (NAR).
So, the picture for the market moving forward is mixed. While higher rates and inflation will serve to cool the market going forward, there still seems to be enough potential buyers to keep the market from sinking too much.
As one broker from Denver, Colorado put it: “If half our buyers got priced out of the market, we would still have eight buyers for every listing.” Additionally, some buyers are thinking that they should buy quickly before rates rise even further.
If this article seems to give mixed messages, I am only reflecting the current thinking among experts, which is, indeed, mixed.
Finally, according to Lawrence Yun, chief economist at the NAR, ”In the early months of the rising rates, we actually don’t see that much of a change in the buyer intensity.” And here comes the caveat: “But inevitably there will be a reduction in the buyer pool.”
Yes. Even the chief economist of the NAR is offering a conflicting view within the above statement.