Home sellers can expect to get high prices for their homes right now, despite the fact that mortgage interest rates are quite high.
This week, the average rate for a 30-year mortgage fell to 5.59% from 5.76% last week. But those average rates on a 30-year mortgage are significantly higher than the 52-week low of 3% and the benchmark 30-year fixed rate of 3.25% from a year ago.
Even if rates remain high, a seller’s market persists. In the second quarter of this year, the median home sale price reached $440,300, compared to $382,600 in the year-ago quarter.
Many experts, including economist Ken H. Johnson of Florida Atlantic University, remain puzzled. He notes that “[eventually] mortgage rates will slow house prices, but that hasn’t happened so far.
This implies that sellers who want high prices for their homes will push to close their deals quickly. Sellers anticipate lower prices and the longer a sale lasts, the lower the selling price they anticipate will be.
The good news is that many experts, including Mike Fratantoni of the Mortgage Bankers Association, think rates are done rising. This implies that current sellers could find themselves in a favorable situation in which the sale price of their home would significantly exceed any increase in mortgage payments due to interest rates.
What does rising mortgage interest rates mean for mortgage lenders?
Rising mortgage interest rates mean that mortgage lenders can expect higher incomes in the future. In early May, it was reported that a home at the median price – $429,000, according to the St. Louis Federal Reserve Bank – would cost $5,640 more per year due to rising rates. This price increase was calculated on the basis of a 30-year fixed rate mortgage of 5.3%, a little below the rate of 5.59% reported this week.
That $5,640 figure equates to a monthly mortgage that’s now $470 higher than it was a year ago. Over the term of a 30-year fixed mortgage, a lender will receive $169,200 more than a lender on a similar home a year ago.
It should be mentioned that the impetus for raising interest rates is runaway inflation. Thus, the consumer, already struggling with price increases everywhere else, must now compete with the average cost of a house, which is nearly $170,000 more expensive.
Mortgage lenders are in a better position, yes, but all stakeholders, including homebuyers, need to be taken into account.
A related analysis concludes that new mortgages increased by $259 due to rising mortgage interest rates. This equates to $93,000 amortized over the life of the loan going directly to the lender.
What does rising mortgage interest rates mean for homebuilders?
For homebuilders, the impact of rising mortgage interest rates is more difficult to measure.
For one, since the percentages of 30-year fixed-rate mortgages began to rise sharply in late December, new housing starts have essentially stagnated. In December, when rates were near 3.3%, there were 1.768 million private new home starts, according to the Census Bureau. By April 2022, that number had fallen slightly to 1.724 million private new home starts. This implies that rising mortgage rates cause a slowdown in construction.
Yet between April of last year and this year, new home starts were up 14.2%. It seems to imply the opposite.
Permissions for new housing starts are also booming, increasing by 18% between April 2021 and April 2022.
It looks like the demand for more housing isn’t slowing down, despite rising rates. This is likely attributable to a lack of supply, which is partly responsible for pushing rental prices to record highs. In short, it looks like homebuilders could be busier as both housing approvals and actual starts of new homes have increased rapidly.
What do rising mortgage interest rates mean for the economy?
Rising mortgage interest rates mean a lot to the economy. It should be noted that much of what is happening is a reaction from the Federal Reserve (Fed).
The Fed reacts to historically high inflation rates. Our central bankers kept benchmark borrowing rates low throughout 2020 and 2021. That meant there was plenty of money floating around in the economy. It also meant that mortgage rates were low, as they generally coincided with benchmark borrowing rates set by central banks.
The Fed also printed massive amounts of stimulus money at the same time. These factors coincided to create an environment where inflation rose dramatically.
Thus, the Fed responded by raising benchmark borrowing rates, which are expected to reach nearly 3% by the end of the year. And the Fed rate hike equals a mortgage rate hike. Both have the effect of cooling the overheated economy.
At the date of publication, Alex Sirois did not hold (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.
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