Surge in Mortgage Rates Slows Down Housing Market in 2024
The housing market, which had shown signs of recovery at the beginning of 2024, has once again hit a roadblock. Experts attribute this slowdown to a surge in mortgage rates, making homes unaffordable for most consumers. The combination of high home prices and borrowing costs has created an affordability problem that hasn’t been seen in decades.
According to Susan Wachter, a professor of real estate at the University of Pennsylvania’s Wharton School of Business, “High mortgage rates and high housing prices have led to an affordability problem of a dimension that we haven’t seen in decades.” This affordability issue can be traced back to stubbornly high inflation, which has prevented the Federal Reserve from cutting interest rates. Mortgage rates are closely tied to the yields on 10-year treasury bonds, which are influenced by the Fed’s benchmark rate.
Recent data from Freddie Mac reveals that the average interest rate for a 30-year fixed mortgage has surged to 6.9%, rebounding after a steady decline at the end of last year. As a result, home sales have plummeted, with mortgage-purchase applications falling by 10% in just one week, according to the Mortgage Bankers Association.
The root cause 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. However, inflation has proven to be stronger than expected, keeping prices above the Fed’s target rate and hindering the decline of interest rates.
“The strengthening of the economy is a surprise,” says Wachter. “It does raise questions about the Fed’s next steps.” Despite consumer prices rising 3.1% in January compared to the previous year, missing expectations for a larger cooldown, inflation remains more than a percentage point above the Fed’s target rate of 2%.
The rise in mortgage rates has had a significant impact on the housing market, particularly because home prices remain high. Potential homebuyers are hesitant to shift to higher mortgage rates that would compound the already elevated home prices. Lu Liu, a professor at the Wharton School, explains, “A lot of people are holding back from moving or selling.” This reluctance among prospective homebuyers to put their own homes up for sale has contributed to the stability, and even slight increase, in home prices.
It is worth noting that each percentage point increase in a mortgage rate can result in thousands, or even tens of thousands, of additional costs each year, depending on the price of the house. This financial burden further discourages potential buyers from entering the market.
In conclusion, the surge in mortgage rates has caused a slowdown in the housing market in 2024. High home prices, combined with borrowing costs, have created an affordability problem that hasn’t been seen in decades. The Federal Reserve’s inability to cut interest rates due to stubbornly high inflation has further exacerbated the situation. As a result, home sales have plummeted, and potential buyers are hesitant to enter the market. The stability of home prices can be attributed to the reluctance among prospective homebuyers to sell their own homes. The future of the housing market remains uncertain as experts question the Fed’s next steps in addressing this issue.