Real Estate Trends: Is The Real Estate Market Slowing Down Due To Mortgage Rates?

Key Takeaways

• Mortgage rates have nearly tripled since this time a year ago.
• However, housing prices have continued to rise, making new mortgages unaffordable.
• Overall, the result is a 41% decline in new loan applications year-over-year.

Over the past year, rising inflation and the Fed boosting interest rates in response have caused turmoil in the housing market. Little more than a year ago, mortgage rates were near record lows. Now, they are around 7%, two to three times higher.

While some markets have seen housing prices fall in response, in most cases, the drop hasn’t been sufficient to keep mortgage payments for new purchases similar. All of this has resulted in higher housing costs for buyers.

We’ll cover what you need to know about mortgage trends for the month and where things might go in the next year.

Background

The COVID-19 pandemic shocked the economy as millions lost their jobs and activity quickly ground down to a halt. The government responded with a combination of stimulus payments and lowered interest rates.

During the pandemic, mortgage rates hit all-time lows, reaching 2.65% in January 2021.

As the country exited the COVID recession and pandemic restrictions eased, inflation began to rise due to factors such as a tight labor market and supply chain issues. Inflation peaked in June 2022 at 9.1%.

In response, the Federal Reserve has boosted its benchmark interest rate to 3.75% to 4% from 0% earlier this year. This has caused mortgage rates to spike.

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Mortgage Demand

As interest rates rise, monthly loan payments become more expensive and less affordable without a commensurate drop in housing prices, which has not materialized in many markets.

Mortgage demand has declined in 2022. Applications for new loans have dropped by roughly 41% since one year ago, and refinancing applications are down more than 86%.

December appears to show a continuation of that trend. The last week of November saw a 0.8% reduction in mortgage applications compared to the week prior. December is traditionally a slow month for home sales, exacerbating the issue most likely.

Rates

Outside of economic uncertainty and concerns about an oncoming recession, the massive increase in mortgage rates is one of the top reasons mortgage demand has dropped.

Interest rates reached a low of 2.65% in early 2021 and remained relatively low for an extended period, hovering between 2.75% and 3.25% for about a year.

As inflation rose, the Federal Reserve responded by raising its benchmark rates, which increased home loan rates. For the week of December 1st, the average rate on a 30-year fixed-rate mortgage in the U.S. was 6.49%.

This is far below historic highs, which reached over 18% back in the early 1980s. However, the last time rates exceeded 6% was in 2008, meaning these rates have not been seen for almost 15 years.

The impact that rate increases have on housing prices is immense.

Imagine you have a thirty-year mortgage with a balance of $250,000. At an interest rate of 2.5%, you’d pay $988 each month for a total of $355,680. Overall, you’d pay over $105,000 in interest.

At an interest rate of 7.5%, your monthly payment balloons to $1,748. That means a total loan payment of $629,280 that includes more than $375,000 in interest over the life of the loan.

Today, families need to afford a monthly payment roughly double what they needed a year ago to afford a home of the same price.

Home Prices

In general, as interest rates rise, house prices tend to fall. This can soften the blow of higher rates forcing higher loan payments on new buyers.

Unfortunately, price reductions have yet to materialize for homebuyers as home prices have risen through 2022.

In the first quarter of 2022, the average home sold for $514,100. In Q3, the average home sold for $542,900. This roughly 5% increase is less than inflation, meaning housing got slightly cheaper.

However, many people have not seen wage increases in line with inflation, meaning affordability has not improved.

Renters are also feeling the burden, with rents up 7.8% year-over-year. This means that everyone who still needs to get their rate locked in is dealing with less affordable housing than a year ago.

Is it a good time to buy or sell?

If you own a home and want to sell it or you are looking to buy a home, you might wonder whether now is the right time. The answer is that nobody really knows.

The Federal Reserve has boosted interest rates in response to rising inflation. The Fed may continue on this path by pushing rates even higher, or it may ease off the accelerator if inflation starts to fall.

It’s also uncertain whether housing prices can continue to increase at their current clip. Many major banks and real estate firms are predicting falling prices over the next year. The decline in mortgage applications indicates less demand, which may force price reductions.

If you’re trying to buy, you’re gambling that the Fed will stop boosting rates or that reduced demand from buyers will force motivated sellers to slash home prices.

However, if you’re on the other side of the equation, you’re likely hoping the Fed will stop increasing interest rates, making the mortgage payments on more expensive homes more affordable.

You also have to hope that fears of a recession don’t become true, leading to fewer potential buyers for your home.

Bottom Line

Buying a home is an essential part of the American Dream. Understandably, it feels out of reach for many of us right now. Recent increases in interest rates, with little change in housing prices, have put this out of reach for man. The fall in mortgage applications illustrates that.

For investors, tracking the real estate market is essential. Even if you’re not looking to buy a house, a weakening real estate market can give you an excellent opportunity to purchase land-focused investments at a discount.

If you are trying to buy a house, you need to monitor home affordability and keep your other investments liquid enough to make a down payment on short notice.

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