Rising interest rates have increased the average monthly loan payment by a whopping $1,000 year over year.

With the rate for a 30-year mortgage rising to 7.08% this week—the highest average since April 2002, according to Freddie Mac—the average monthly loan payment is now $1,000 more than a year ago, Nadia Evangelou, senior economist and director of forecasting for the National Association of REALTORS®, writes on the Economists’ Outlook blog.

That’s prompting a sharp pullback in the housing market as home buyers digest the higher rates. Mortgage applications for home purchases—a gauge of homebuying activity—are nearly half of what it was a year ago, the Mortgage Bankers Association reported this week.

Trying to snag a lower rate, more home buyers are reaching for an adjustable-rate mortgage, which tend to have lower introductory rates for a set period of time before resetting. Though ARMs are viewed as a riskier loan product, home buyers are being tempted: This week’s rate for a 5-year ARM is 5.96%. The share of home buyers applying for an ARM has more than quadrupled since the start of the year, MBA reports.

Higher mortgage rates are creating a “greater stagnation in the housing market,” says Sam Khater, Freddie Mac’s chief economist. “As inflation endures, consumers are seeing higher costs at every turn, causing further declines in consumer confidence this month. In fact, many potential home buyers are choosing to wait and see where the housing market will end up, pushing demand and home prices further downward.”

S&P’s CoreLogic Case-Shiller Index shows home prices fell at a record pace in August, dropping 2.6% in monthly comparisons from a year ago. Existing-home sales also are sliding, down 24% year over year in September, according to NAR data. And problems continue to brew for the new-home market, which saw sales plunge nearly 18% in September compared to a year earlier, prompting home builders to press the brakes on future construction, the Commerce Department reports.

Freddie Mac reports the following national averages with mortgage rates for the week ending Oct. 27:

• 30-year fixed-rate mortgages: averaged 7.08% with an average 0.8 point, up from last week’s 6.94% average. Last year at this time, 30-year rates averaged 3.14%.
• 15-year fixed-rate mortgages: averaged 6.36%, with an average 1.4 point, up from last week’s 6.23% average. A year ago, 15-year rates averaged 2.37%.
• 5-year adjustable-rate mortgages: averaged 5.96%, with an average 0.3 point, increasing from last week’s 5.71% average. A year ago, 5-year ARMs averaged 2.56%.

Freddie Mac reports commitment rates along with average points to better reflect the upfront costs of obtaining the mortgage.

©National Association of REALTORS®
Reprinted with permission

Persistent inflation is proving “quite harmful to the housing market,” says NAR Chief Economist Lawrence Yun.

The housing market is quickly contracting as rising mortgage rates and stubbornly high inflation prompts more home buyers—and even sellers—to back away. The National Association of REALTORS®’ Pending Home Sales Index, a forward-looking indicator based on home contract signings, dropped for the fourth consecutive month in September, down 10.2% compared to August and a whopping 31% compared to a year earlier.

“Persistent inflation has proven quite harmful to the housing market,” says NAR Chief Economist Lawrence Yun. “The Federal Reserve has had to drastically raise interest rates to quell inflation, which has resulted in far fewer buyers and even fewer sellers.”

The number of active listings also is falling quickly as more homeowners grow reluctant to trade in the lower mortgage rates they secured in the last few years for today’s higher rates. “The new normal for mortgage rates could be around 7% for a while,” Yun says. “On a $300,000 loan, that translates to a typical monthly mortgage payment of nearly $2,000, compared to $1,265 just one year ago—a difference of more than $700 per month. Only when inflation is tamed will mortgage rates retreat and boost home purchasing power for buyers.”

NAR’s latest report also shows that all four major regions of the U.S. are seeing a sharp pullback in home sales, with pending home sales down about 27% or more on a year-over-year basis in each region. The West is seeing the largest yearly contraction in pending home sales, down 38.7% annually. However, the Northeast posted the largest month-over-month drop in September, with pending home sales down 16.1% compared to August, NAR reports.

©National Association of REALTORS®
Reprinted with permission

Economists eye two possible scenarios: Rates could rise to 8% or higher by the end of the year, or they could stabilize. Know what to expect.

Mortgage rates this week dipped slightly below 7%, even after the Federal Reserve aggressively raised its benchmark interest rate again to tame inflation. The 30-year fixed-rate mortgage averaged 6.95% this week after hitting a 20-year high of 7.08% last week, Freddie Mac reports.

“Even with the Federal Reserve raising its short-term fed funds rate by another large amount, longer-term interest rates look to move only slightly,” says Lawrence Yun, chief economist for the National Association of REALTORS®. “The mortgage market has already priced in the latest Fed move.”

On Wednesday, the Fed approved its fourth consecutive rate hike of three-quarters of a percentage point to help bring down 40-year high inflation. The central bank’s lending rate now falls within the target range of 3.75% to 4%—its highest since January 2008. “The inflation picture has become more and more challenging over the course of this year,” Fed Chairman Jerome Powell said at a news conference Wednesday. “That means we have to have policy be more restrictive, and that narrows the path to a soft landing.”

What Happens Next?

Mortgage rates will start to “drift lower” once inflation has been contained—but that could be another year or two, Yun notes. However, the slight dip this week in rates likely will offer little relief to priced-out buyers. “Unsure buyers navigating an unpredictable landscape keeps demand declining while other potential buyers remain sidelined from an affordability standpoint,” says Sam Khater, Freddie Mac’s chief economist.

Mortgage rates likely will be volatile in the coming weeks, adds Lisa Sturtevant, chief economist for Bright MLS. “Home buyers expecting mortgage rates to fall significantly will be disappointed,” she says. “The question is: Will rates stabilize or will they push even higher?”

Sturtevant says that if inflation remains stubbornly high, the Federal Reserve could continue to aggressively raise rates. “Under this scenario of persistently higher inflation, mortgage rates could climb to 8% or beyond in late 2022 and into the first part of 2023,” she says.

But if October’s inflation data—which will be released next week—shows signs of easing and offers some indication that the Fed’s tactics are working, the Fed could pull back on its rate increases. That could mean mortgage rates would stabilize, “though probably still remaining around 7%, on average, through the first part of 2023,” she notes.

Mortgage Rate Averages This Week

Freddie Mac reported the following national averages with mortgage rates for the week ending Nov. 3:

• 30-year fixed-rate mortgages: averaged 6.95%, with an average 0.8, falling last week’s 7.08% average. Last year at this time, 30-year rates averaged 3.09%.
• 15-year fixed-rate mortgages: averaged 6.29%, with an average 1.2 point, dropping from last week’s 6.36% average. A year ago, 15-year rates averaged 2.35%.
• 5-year hybrid adjustable-rate mortgages: averaged 5.95%, with an average 0.2 point, falling from last week’s 5.96% average. A year ago, 5-year ARMs averaged 2.54%.

Freddie Mac reports commitment rates along with average fees to better reflect the total upfront cost of obtaining the mortgage.

©National Association of REALTORS®
Reprinted with permission

The third quarter may have marked the end of price surges as higher mortgage rates put a damper on projections for property appreciation. Read more from NAR’s latest report.

Home prices continued to climb in the third quarter of this year, but the upward trend may finally be coming to an end, according to the National Association of REALTORS®’ latest quarterly report. Higher mortgage rates are starting to weigh on home price growth, though practically every major metro saw home prices rise in the third quarter. Forty-six percent of the 185 markets that NAR tracks even registered double-digit increases.

The national median price for a single-family existing home was $398,000 in the third quarter, an 8.6% jump from a year earlier. That’s a slower pace than in the second quarter, when the median price was 14.2% higher year over year. More easing is expected over the next few months, says NAR Chief Economist Lawrence Yun. “Much lower buyer capacity has slowed home price growth, and the trend will continue until mortgage rates stop rising,” he says. “The median income needed to buy a typical home has risen to $88,300. That’s almost $40,000 more than it was prior to the start of the pandemic.”

Meanwhile, the monthly mortgage payment on a typical existing single-family home with a 20% down payment swelled to $1,840 in the third quarter, up 50% year over year. The 30-year fixed-rate mortgage is currently above 7%—double what it was a year ago—prompting house hunters to revisit what they can afford. The typical family now needs a qualifying income of at least $100,000 to afford a 10% down payment on a mortgage in 59 markets, up from 53 markets in the second quarter. Further, a family with a qualifying income of less than $50,000 can afford a home in just 17 of the markets NAR tracks, down from 23 in the previous quarter.

First-time home buyers are struggling with these dynamics. A typical starter home worth about $338,700 would have a monthly mortgage payment of $1,808 with a 10% down payment, an increase of nearly $600 compared to a year ago. First-time buyers typically spend nearly 38% of their income on mortgage payments; most financial experts consider households financially burdened when they spend more than 25% of their income on housing.

Where Prices Are Rising the Most

Some of the priciest markets in the country, like the San Jose and San Francisco areas in California—with a median home price of $1.7 million and $1.3 million, respectively—could see some cooling in the months ahead. “The more expensive markets on the West Coast will likely experience some price declines following this rapid price appreciation, which is the result of many years of limited homebuilding,” Yun says. “The Midwest, with relatively affordable home prices, will likely continue to see price gains as incomes and rents both rise.”

The South not only saw the highest share of sales of existing single-family homes in the third quarter but also the highest year-over-year appreciation in the country, NAR’s report shows. Prices jumped 11.9% in the region, followed by an 8.2% increase in the Northeast, 7.4% in the West and 6.6% in the Midwest.

The following 10 metros posted the largest year-over-year price increases in the country in the third quarter:

• North Port-Sarasota-Bradenton, Fla.: 23.8%
• Lakeland-Winter Haven, Fla.: 21.2%
• Myrtle Beach-Conway-North Myrtle Beach, S.C.-N.C.: 21.1%
• Panama City, Fla.: 20.5%
• Deltona-Daytona Beach-Ormond Beach, Fla.: 19.6%
• Port St. Lucie, Fla.: 19.4%
• Greenville-Anderson-Mauldin, S.C.: 18.9%
• Kingsport-Bristol-Bristol, Tenn.-Va.: 18.8%
• Tampa-St. Petersburg-Clearwater, Fla.: 18.8%
• Ocala, Fla.: 18.8%

©National Association of REALTORS®
Reprinted with permission

October’s lower inflation rate is a welcome sign for a housing market that’s seen steady declines in 2022.

A recent report showing that the rate of inflation declined in October is good news for the real estate industry, and possibly a bellwether of declining mortgage rates in coming months, Lawrence Yun, chief economist for the National Association of REALTORS®, told thousands of attendees Friday at NAR NXT, The REALTOR® Experience(link is external) in Orlando, Fla.

On Thursday, the Bureau of Labor Statistics reported a 7.7% rate of inflation in October’s Consumer Price Index. That’s still causing pain at the grocery store and the gas pump, Yun said, but it’s down from 8.2% in September and may mean that mortgage rates have topped out. The jump in the rate for a 30-year fixed-rate mortgage, from about 3% at the start of the year to 7% today, has hit home sales hard. Sales were down 1.5% month over month and 23.8% year over year in September, according to NAR’s latest existing-home sales data.

What’s concerning is that the housing sector is a big contributor to gross domestic product, and the slowdown is pulling down the economy, Yun said. “If the housing market was stabilizing and not declining, GDP would be comfortably in the positive,” Yun said, “and we would not even be talking about a recession.”

Despite the headwinds of higher mortgage rates and slowing sales, severely limited inventory will keep home prices from declining dramatically in most of the country over the next year. “For most parts of the country, home prices are holding steady since available inventory is extremely low,” Yun said. “Some places are experiencing price gains, while some places, most notably in California, are seeing prices pull back.”

Even in areas where agents are seeing price declines, Yun said, 2022 is not a repeat of the 2008 housing crisis, when prices collapsed and foreclosures spiked. “Housing inventory is about a quarter of what it was in 2008,” he said. “Distressed property sales are almost nonexistent, about 2%, and nowhere near the 30% mark seen during the housing crash.”

Many factors are contributing to the undersupply of housing. Builders aren’t building enough homes. Investors have taken single-family homes out of the market for potential homeowners. And some owners are converting homes to short-term rentals rather than selling. But one added factor this year is sellers’ unwillingness to give up their low mortgage rate, Yun said. “They may be thinking about getting a bigger home for their growing family but then deciding: ‘We love our 3% mortgage more than extra room for the baby.’” In fact, if mortgage rates were following historic norms, they’d be lower than they are today, Yun said, showing a graph that demonstrated how mortgage rates run parallel to the government borrowing rate. Generally, the gap between the two rates remains constant. It grew in 2008 after the collapse of Lehman Brothers and again in 2020 when pandemic uncertainty gripped the country. And it’s grown again this year. “Today, we’re not in panic mode. Why the abnormal spread?” Yun asked. It’s a question NAR’s advocacy team is exploring with policymakers in Washington. “Without it, mortgage rates would be 5.8% rather than 7%, and we’d see the housing market begin to revive.”

©National Association of REALTORS®
Reprinted with permission

Pending home sales continued to fall in October as higher mortgage rates shook buyer confidence. Read more from NAR’s latest home sales report.

Pending home sales fell for the fifth consecutive month in October as rising mortgage rates brought many housing markets to a halt. But now that rates show signs of stabilizing, economists say more home buyers—particularly first-timers—may gradually return to the market.

Still, contract signings dropped 4.6% in October and were down 37% from the previous year, the National Association of REALTORS® reported Wednesday. It was a difficult month for the market as buyers faced 20-year-high mortgage rates, with the 30-year fixed-rate loan eclipsing an average of 7%. Last week, however, the 30-year loan averaged 6.58%, marking the second consecutive week of declines, according to Freddie Mac.

“The West region, in particular, suffered from the combination of high interest rates and expensive home prices,” says NAR Chief Economist Lawrence Yun. “Only the Midwest squeaked out a gain. The upcoming months should see a return of buyers, as mortgage rates appear to have already peaked and have been coming down since mid-November.” 

Housing economists are looking ahead to what the next year could hold for the real estate market. Housing activity is still expected to be robust, but home prices are expected to slow their record pace of growth, according to realtor.com®’s Housing Forecast 2023(link is external). In fact, realtor.com® predicts, annual price growth could moderate to the single digits—likely around 5.4%—for the first time since 2020.

Realtor.com® also forecasts a 22.8% increase in the supply of existing homes on the market in 2023, which would give home buyers more choices. Home sales, however, are expected to fall 14.1%, reaching their lowest level since 2012, according to realtor.com®. Rents, meanwhile, are expected to surge to new highs in 2023, adding more budget pressures on renter households who aspire to homeownership.

“Compared to the wild ride of the past two years, 2023 will be a slower-paced housing market, which means drastic shifts like price declines may not happen as quickly as some have anticipated,” says realtor.com® Chief Economist Danielle Hale. “It will be a challenging year for both buyers and sellers—but an important one in setting the stage for home sales to return to a sustainable pace over the next two to three years.” NAR will host a virtual Real Estate Forecast Summit on Dec. 13 at noon ET, where Yun and other leading economists will provide a year-end review of the 2022 real estate market and a look ahead at the economy for 2023.

©National Association of REALTORS®
Reprinted with permission