30-year fixed mortgage rates averaged just 7% last week, the first time in 20 years, according to Freddie Mac. With the Federal Reserve expected to announce another major interest rate hike, this could be evidence of a larger downturn in housing. What do rising mortgage rates mean for a possible real estate crash?
Well, with housing affordability already trending around its worst on record, rising mortgage rates only strengthen the case for a malicious drop in house prices. While some naysayers may argue that we are still a long way from the peak mortgage rates of 18% of the 1980s, they fail to take into account the disproportionate growth in house prices relative to income.
Indeed, in August, US housing affordability fell to its lowest level since 1989 due to high house prices, rapidly rising mortgage rates and relatively stagnant wage growth. In fact, median home prices soared as high as $440,300 in the second quarter of this year, the first time that figure has breached the psychological barrier of $400,000.
Home prices have been on a nearly vertical trajectory since the Covid-19 pandemic first forced Americans home. Lately, however, the once-hot real estate market has been freezing cold. Single-family home sales are down 23% from last September, as mortgage application volume trends around its lowest since 1997, according to the National Association of Realtors (NAR).
While many economists argue that higher lending standards and generally limited home inventory will prevent a substantial pullback in home prices, that’s not the whole story. A sharp decline in housing demand caused by a Fed-induced recession could put unexpectedly strong downward pressure on the housing market.
Will mortgage rates continue to rise?
The Fed has long hinted that its inflation-mitigation program is far from over and could have unfortunate consequences for the broader economy. Even Fed Chairman Jerome Powell said the central bank’s hawkish agenda could well lead to a broader recession in the country. “No one knows if this process will lead to a recession or, if so, how big that recession would be,” Powell said in September.
In 2021, 30-year fixed-rate mortgages had an average lending rate of just 2.96%, near its pandemic low. As the Fed raised interest rates several times throughout the year, mortgage rates rose significantly. Clearly, the Fed’s rate hikes throughout the year had a dramatic effect on home lending. Looking ahead to the next highly anticipated Fed meeting on Wednesday, it looks like the stage is set for even higher mortgage rates.
With what will likely be its fourth “oversized” 75 basis point rate hike this week, and another hike slated for December, the Fed could well write the script for mortgages as we approach 2023. The question remains: how high will the prices go?
Well, depending on who you ask, you’ll likely find a variety of different projections. According to some, however, the 30-year fixed rate has plenty of room to climb over the next year.
Christopher Whalen, president of Whalen Global Advisors, told MarketWatch that mortgage rates could “easily touch 10% by February” even if the Fed refuses to raise interest rates in December.
Meanwhile, NAR’s chief economist, Lawrence Yun, estimates rates could hit 8.5% next year “which would be another big shock to the housing market.”
First published on InvestorPlace. Read here.
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