Mortgage Rates Surge to 21-Year High, Cooling Housing Market Once Again
The housing market, which had been showing signs of improvement at the start of 2024, has once again hit a roadblock. Experts attribute this slowdown to a surge in mortgage rates, making it increasingly difficult for consumers to afford homes with the combination of high prices and borrowing costs. The rise in mortgage rates can be attributed to stubbornly high inflation, which has prevented the Federal Reserve from making interest rate cuts.
Susan Wachter, a professor of real estate at the University of Pennsylvania’s Wharton School of Business, explains that “high mortgage rates and high housing prices have led to an affordability problem of a dimension that we haven’t seen in decades.” According to a report from Freddie Mac, the average interest rate for a 30-year fixed mortgage has skyrocketed to 6.9%, rebounding after a steady decline towards the end of last year. As a result, home sales have plummeted, with mortgage-purchase applications falling by 10% in just one week.
The root of this housing market dynamic can be traced back to a highly anticipated announcement made by the central bank in December. The announcement revealed expectations of interest rate cuts in 2024, which sparked optimism among market players who believed it signaled the end of the Fed’s fight against inflation and a decline in interest rates. Yields on 10-year treasury bonds fell as a result, and mortgage rates followed suit.
However, inflation has proven to be uncooperative. Strong economic performance and resilient consumer demand have contributed to higher-than-expected price increases, keeping them above the Fed’s target rate. “The strengthening of the economy is a surprise,” says Wachter. “It does raise questions about the Fed’s next steps.”
Consumer prices rose by 3.1% in January compared to the previous year, slightly lower than expected but still above the Fed’s target rate of 2%. This inflation rate is reflected in the 10-year treasury rate, which in turn pushes mortgage rates up.
The impact of rising mortgage rates on the housing market is significant. The average 30-year fixed mortgage rate stood at 4.45% when the Fed initiated the rise of bond yields with its first rate hike in March 2022. Now, the average mortgage rate is nearly 2.5 percentage points higher. According to Rocket Mortgage, each percentage point increase in a mortgage rate can add thousands or even tens of thousands of dollars in additional costs each year, depending on the price of the house.
The combination of soaring mortgage rates and high housing prices has created a freeze in the housing market. Potential homebuyers are hesitant to shift to higher rates that would compound the already elevated home prices. Lu Liu, a professor at the Wharton School, explains that “a lot of people are holding back from moving or selling.” This reluctance among prospective homebuyers to put their own homes up for sale may explain why home prices have remained stable or even increased.
In conclusion, the surge in mortgage rates has once again cooled down the housing market. High borrowing costs, combined with elevated home prices, have created an affordability problem for consumers. The Federal Reserve’s delay in making interest rate cuts due to stubbornly high inflation has contributed to this situation. As a result, home sales have plummeted, and potential homebuyers are hesitant to enter the market. It remains to be seen how the housing market will navigate these challenges and whether the Fed will take further action to address the issue.