The housing market is buckling under the strain of soaring mortgage rates, with the average rate on a 30-year mortgage hitting a 21-year high. This puts an additional layer of pressure on homebuyers who are already grappling with surging home prices. Despite the escalating mortgage rates, home prices have remained resilient due to the low inventory of homes for sale, limiting the options for prospective buyers and keeping the competition high.

However, economists are predicting that this latest surge in rates could be the tipping point that triggers a downward trend in home prices. The average rate for a 30-year fixed mortgage rose sharply to 7.09% on Thursday, its highest since 2002, according to Freddie Mac. This escalation could further stretch homebuyers’ budgets and potentially lead to a decrease in home prices. "The latest rise in rates is likely to throw a deep chill into housing markets," warns Douglas Porter, chief economist at BMO Capital Markets.

Mortgage Rates Surge to 21-Year High: Impact on Housing Market

Mortgage rates have soared to a 21-year high, with the average rate for a 30-year fixed mortgage reaching 7.09%. This increase is causing significant strain on the housing market, which could potentially reverse the recent rebound in home prices.

The Impact on Homebuyers and Home Prices

The surge in mortgage rates puts additional pressure on homebuyers who are already struggling to afford purchases. This could potentially lead to a decrease in home prices. As Douglas Porter, chief economist at BMO Capital Markets, comments, the rise in rates is expected to significantly cool the housing market.

Despite the higher mortgage rates, home prices have remained resilient, hitting record highs over the summer due to a low number of homes for sale. However, the recent increase in rates could disrupt this balance and cause a downward correction in home prices, according to Matthew Walsh, an economist at Moody’s Analytics.

Affordability Concerns and Market Deadlock

The surge in mortgage rates since mid-2022 has deterred both buyers and sellers, leading to a market deadlock. For first-time homebuyers, affordability is a substantial issue. The typical monthly payment for a mortgage on a newly-purchased home has increased significantly, from $1,426.21 pre-pandemic to $2,268 as of May. This means that a buyer would now require a salary of $97,204 to afford a home, compared to $61,123 before the pandemic.

Moreover, the typical household can no longer afford to buy a house. The median household income in 2021 was $70,784, which falls short of the amount needed to afford a home. This is a stark contrast to the situation in 2019, when the median household income of $68,703 was sufficient to make monthly mortgage payments on a typical home.

The Double Whammy: Higher Prices and Higher Rates

Homebuyers now face the double whammy of higher home prices and ballooning mortgage rates. Home prices were 43% higher in May than at the start of the pandemic. The current average rate for a 30-year fixed-rate mortgage is more than double the pre-pandemic rate, and far above the record-low rate offered in 2021.

The surge in mortgage rates has added hundreds of dollars to typical monthly payments. For instance, a buyer would pay $738 more per month than they would have to buy the same-priced house in February 2020 due to higher mortgage rates alone.

The Fed’s Role and Traders’ Fears

The rise in mortgage rates is a result of the Federal Reserve’s anti-inflation rate hikes since March 2022. The central bank has raised its benchmark interest rate to its highest since 2001, pushing up rates for mortgages and other types of loans. Recent data showing a robust economy despite the Fed’s cooling efforts have sparked fears among traders that rates could remain high for longer.

Takeaways

The surge in mortgage rates to a 21-year high is causing significant strain on the housing market. Buyers, especially first-time buyers, are struggling with affordability, and sellers are reluctant to give up their low fixed rates. The situation is exacerbated by the Federal Reserve’s rate hikes, which are causing a rise in mortgage rates. As a result, the housing market could be on the brink of a downward price correction. It’s clear that both buyers and sellers will need to adapt to this new economic environment.