Mortgage rates, now around 6.5%, are cooling down the housing market and triggering mass layoffs in the mortgage and real estate industries.
Mortgage rates have nearly doubled to around 6.5% from the beginning of this year, but they may have not peaked, putting pressure on affordability challenges for most prospective buyers as the Federal Reserve vows to tame inflation.
Following the Fed’s decision to raise interest rates by an additional 75 basis points on Wednesday, the central bank said it will hike rates as high as 4.6% in 2023. Goldman Sachs predicts a 75 bps hike at the November meeting followed by a 50 bps raise in December and a 25 bps increase in January 2023.
Interest rates can move higher as the economy stays firm, Logan Mohtashami, Lead Analyst at HousingWire said. “However, this is all about a tug of war between how long the economy can still be expanding.”
The Fed’s short-term rate does not directly impact long-term mortgage rates but it does steer market activity to create higher rates and reduce demand. Time will tell whether the mortgage market had already priced in expectation of the Fed’s rate hike on Wednesday, but in the months ahead, many industry watchers forecast mortgage rates to continue their climb until the central bank slows down with its tightening of its monetary policy.
“Before the Federal Reserve raised the federal funds rate by 0.75 percentage point this week, mortgage rates had already risen by a similar amount,” said Holden Lewis, home and mortgage expert at NerdWallet. “Now the Fed has signaled that it will hike rates several more times this year and next year, so mortgage rates have plenty of room to go up even more.”
We do not see new construction returning in a meaningful way any time soon. Our macro-outlook is that demand for housing will remain out of balance with supply for the mid to long term.
Kurt Carlton, President of New Western
“The trickle-down effect of rising borrowing costs means that homebuyers will continue to feel higher monthly payments,” added George Ratiu, manager of economics research at Realtor.com.
With the rate for a 30-year mortgage 300 basis points higher than 2021, the buyer of a median-priced home this week is facing a monthly payment that is 66% higher than the same week in 2021, Ratiu noted.
Marty Green, principal with mortgage law firm Polunsky Beitel Green, described increasing affordability pressures in the housing market as “throwing cold water on what was a frenzied residential real estate market.”
“Where ‘inventory’ was the big concern in 2021 and early 2022, the concern today is ‘affordability,’ with the combination of substantial price increases and rising rates simply pricing more and more Americans out of the market,” Green said.
The number of existing home sales reflects how the housing sector has been impacted by the Fed’s interest rate policies. Existing home sales declined for seven consecutive months in August, declining 0.4% to a seasonally adjusted annual rate of 4.8 million units last month from July, according to the National Association of Realtors (NAR). Existing home sales are down 19.9% year-over-year.
They (buyers with less financial stability) are having to go to surrounding towns instead of where everybody wants to be because they can no longer afford the more desirable locations.
Will Savage, an LO at PMC Mortgage
Although home price growth slowed and demand has weakened, tight supply is keeping prices elevated. The median existing house price increased 7.7% from a year earlier to $389,500 in August. While housing prices typically slow in July and August, they surged to an all-time-high of $413,800 in June.
With the mortgage industry accepting the current rate environment as a “necessary period of adjustment,” lenders are expected to roll out “creative mortgage products” to entice more borrowers, said Kurt Carlton, co-founder and president of real estate investment firm New Western.
“We do not see new construction returning in a meaningful way any time soon. Our macro-outlook is that demand for housing will remain out of balance with supply for the mid to long term,” Carlton said.
According to the NAR, there were 1.28 million existing homes on the market in August and would take 3.2 months to exhaust the current inventory of existing homes at last month’s sales pace. A five-to-seven-month supply is viewed as a healthy balance between supply and demand.
Loan officers get an up-close look at how much shoppers and capital-strapped buyers are getting priced out in the rate-rising environment.
Will Savage, a loan originator at PMC Mortgage, sees many pre-approved clients having to get reapproved for a mortgage based on the rate increases.
With higher monthly mortgage payments, buyers who had money are getting spooked and some those with less financial stability are getting priced out, Savage explained.
“They (buyers with less financial stability) are having to go to surrounding towns instead of where everybody wants to be because they can no longer afford the more desirable locations.”
And for those shoppers who choose to buy, “they may be more likely to select an adjustable-rate mortgage (ARM) because their initial payments will be lower than those they would find with a fixed rate mortgage,” said Michele Raneri, vice president of U.S. research and consulting at TransUnion.
Buyers are going to have more choices than they’ve had in the last couple of years.
Matt Topping, an LO at Movement Mortgage
The way ARMs work is lenders offer lower mortgage rates for the initial term, generally three, five, seven years. After that initial period ends, rates adjust periodically based on a benchmark or index, such as the Secured Overnight Financing Rate (SOFR), based on actual transactions in the Treasury repurchase market.
About 9.1% of total mortgage applications were for ARMs for the week ending Sep. 16, according to the Mortgage Bankers Association (MBA). The volume is slightly lower than in May when it hit a 14-year high of nearly 11% of the overall residential mortgage applications.
While some housing market watchers, including Ratiu, expect that household finances will get squeezed by rising costs and a shortage of homes for sale, some hopeful loan officers see opportunities for buyers as they may be seeing price cuts.
“We are already starting to have sellers realize we had a great run for a couple years and we’re getting more inventory,” said Matt Topping, a senior loan officer at Movement Mortgage.
“Buyers are going to have more choices than they’ve had in the last couple of years. They’re also going to have less competition and I think they’re going to be sellers who are more amenable to things they may have not even considered six months ago, a year ago.”