Mortgage rates have rebounded from their pandemic-era record lows and are rising rapidly. Those rising rates will eventually tamp down demand and cool the smoldering housing market, although the question of how quickly remains to be seen.
The average 30-year fixed-rate mortgage was 4.42%, up more than 1.25% from a year before, according to Freddie Mac. Three weeks ago, the rate sat at 3.76% — the fastest three-week increase since the 1980s.
Much of the pressure behind the rising interest rates comes from the Federal Reserve, which raised its interest rate target by a quarter of a percentage point, the first interest rate hike since 2018.
Further adding fuel to the mortgage rate equation is Federal Reserve Chairman Jerome Powell, who has signaled the central bank might be more aggressive in hiking rates at its forthcoming meetings in response to the country’s inflation. He said the Fed could hike rates by half a percentage point at its May meeting, a move akin to two simultaneous rate hikes — something that hasn’t been done in more than two decades.
“Ultimately, the Fed is pretty far behind the curve when it comes to inflation. So they’re probably going to have to raise rates pretty substantially, and even though that typically might not put a lot of pressure on longer-term rates, which mortgages are based on, it is going to put some pressure on them,” said David Sacco, a practitioner in residence at the University of New Haven finance department.
He pointed out to the Washington Examiner that there is still a lot of demand in the housing market despite the rapidly rising mortgage rates.
The record-low mortgage rates spurred some consumers to purchase homes, offsetting some of the growth in home prices, although the most recent data show that the higher rates might have begun hitting home sales.
Existing-home sales declined by 7.2% in February to a seasonally adjusted annual rate of 6.02 million, according to a report by the National Association of Realtors released in March. Additionally, mortgage applications have decreased over the past three weeks, according to the Mortgage Bankers Association.
Gay Cororaton, NAR’s housing and commercial research director, told the Washington Examiner that based on data the NAR has released about existing and pending home sales on balance, it appears as though the uptick in mortgage rates is having an impact on demand for housing.
Cororaton said she expects that mortgage rates could rise to 6% by the end of next year, which would be their highest level since the middle of the Great Recession.
Still, Cororaton described a sort of “tug of war” that exists because even though rates are rising and making housing less affordable for consumers, mortgage rates are expected to continue growing throughout this year. So some are trying to buy now before those rates inevitably inch even higher.
“If you have the money and you’re in the market, you might as well lock it in now,” she said, predicting that the most significant drop in demand would likely come next year.
Consumer prices rose at a breakneck 7.9% for the 12 months ending in February, which also has a ripple effect on home sales because people can afford less for the same amount of money they had last year.
The Fed is now focused on bringing down inflation by hiking interest rates. Still, despite the likely aggressive pace and scale of the hikes, they will not result in inflation immediately dropping. Instead, inflation will likely remain high throughout the year, causing even more financial strain for those facing higher mortgage rates.
Another factor that could throw a monkey wrench into the entire housing market would be if the economy fell into a recession. Some economists are forecasting recessionary conditions to begin this year as war rages in Ukraine, inflation rises, and the Fed hikes interest rates.
Goldman Sachs researchers placed the odds that the United States will enter a recession during the next year at about 20% to 35%. The financial services giant also cut its forecast GDP growth for the U.S. to 1.75% this year after previously forecasting a 2% increase.
Additionally, some precursors of a recession have been flashing red. The yield on the five-year treasury note recently inched higher than the yield on 30-year notes, as did the yield curve between two-year and 10-year notes. The flips, known as “inversions,” show investors have little faith in the ability for growth to pick up in the coming years and have preceded every recession in the last 50 years.
The Fed is effectively trying to slow the economy by raising interest rates, a sacrifice that must be made to tame inflation. Inflation is, in part, driven by increased demand, so when it slows, prices tend to tamp down.
“The trick for the Fed is can they sort of cool the economy, slow it down enough to take off some of the pressure on prices, versus do they go too far and basically throw us into a recession,” Sacco said, noting that while a full-blown recession would also have the effect of driving down prices, it could translate to lost jobs.
“The Fed is trying to walk a very, very narrow tightrope,” he continued, adding that because of how much monetary and fiscal stimulus there has been during the pandemic, it is going to be very difficult for the Fed to slow inflation without causing at least a minor recession.
Cororaton said that while she personally doesn’t think the U.S. will sink into a recession, if the economy did, it would be a “triple whammy” for the housing market. That triple whammy would include higher mortgage rates, persistently high inflation, and slowed economic growth — all of which would put a damper on home sales.
