As the Federal Reserve raises interest rates to fight inflation, the housing market has been feeling the effects of this monetary policy more intensely than other parts of the economy.
Since the beginning of the year, the interest rate on a 30-year mortgage loan has climbed from about 3% to nearly 7%, making it much more expensive to buy a house.
Buying a home in the U.S. with a 20% down payment in 2021 — when the average sales price according to data from the National Association of Realtors (NAR) was $357,100 and the average 30-year mortgage interest rate was about 3% — meant your monthly payment would have been roughly $1,204.
As of May of this year, the average median price of a home in the U.S. climbed to $414,200, the NAR data shows. Accounting for the higher mortgage rates, which reached a 6.7% average this week, the monthly payment would be about $2,138 — a jaw-dropping increase of over 43%!
Put differently, NAR said in August the average qualifying annual income to be able to afford a home in the U.S. with a 20% down payment reached $88,371 — a 37% increase from the qualifying income of $58,314 one year ago.
Fixed mortgage rates track the yield on the 10-year Treasury note, not the Fed’s key federal funds rate — at least not directly. But both 10-year yields and the federal funds rate are moving higher in response to inflation. That means lenders demand more money to get ahead of further price increases. As long as inflation remains high, the housing market will stay expensive and increasingly out of reach for average Americans.
But mortgage rates are unlikely to go much higher than 7%, according to experts who track the housing market for banks. Lenders are demanding a higher premium because of the volatility financial markets have been experiencing, and the price uncertainty that accompanies it.
We are approaching a point where housing could become so unaffordable that the market completely stalls. Assuming bond yields stabilize, lenders may begin to soften their terms.
We are currently seeing signs that the housing prices are cooling. In July, home prices fell for the first time since March 2012, according to the S&P CoreLogic Case-Shiller index which tracks changes in real estate prices. The housing group Redfin also reported the number of homes sold had decreased by 23% year-on-year in July.
How much higher could mortgage rates go? The consensus is that mortgage interest rates will potentially be topping out at 7%.