What seemed unthinkable just a few months ago has happened: Freddie Mac’s benchmark mortgage rate has risen above 7%.
The average rate for a 30-year fixed rate loan is 7.08% this week, according to the Freddie Mac Weekly Lender Survey. This is the highest average rate since 2002.
Rates started the year at just 3.22%. The rise since has been one of the fastest in the survey’s 51-year history.
“The rate of increase took us by surprise,” Len Kiefer, deputy chief economist at Freddie Mac, said in a webinar titled A Conversation About the Economy.
“This has huge implications for the housing market, the mortgage industry and the broader US economy,” he added.
Mortgage rates have taken off thanks to inflation, which has been hovering over 8% since March. In an effort to curb inflation, the Federal Reserve has raised the federal funds rate — the rate banks charge themselves for overnight borrowing — by a total of 3.25% this year.
This pushed up interest rates on all sorts of consumer credit products, including mortgagesupper.
The psychological toll of 7% mortgage rates
This rapid recovery in rates sent the market into a frenzy, says Jerimiah Taylor, vice president of real estate and mortgages at real estate startup OJO Labs. Taylor compares the situation to driving your car down a highway at 150 miles per hour and suddenly slowing to the speed limit.
“Suddenly that speed limit feels really slow compared to how fast you’re going,” Taylor adds.
Buyers may perceive a 7% rate as significantly more expensive than 6.8%, says Ralph McLaughlin, chief economist at real estate startup Haus. In reality, the dollar difference won’t be that big, however, only $40 for a $300,000 loan.
The net effect of hitting 7% will be a faster slowdown in demand, especially since it coincides with what McLaughlin calls a “black hole,” the period between Halloween and New Years when home sales traditionally slow.
But rather than seeing the downturn as negative, he sees it as a necessary step to bring the market back into balance.
“The housing market for the past two years has been completely out of whack and has never been sustainable,” he says. The longer an unsustainable market lasts, he explains, the more severe the inevitable correction will be.
“If it takes 7% mortgage rates to help get to a more normal level, then so be it.”
Fewer people can afford to buy homes
Higher rates mean higher monthly payments as buying a home becomes more expensive as more and more buyers walk away from the market.
According to Mortgage Bankers Association.
Due to higher payouts, there are about 32% fewer active buyers compared to a year ago, says Orphe Divoungay, senior economist at listing site Zillow.
With rates now at 7%, that number of buyers should drop further. “If affordability is further constrained due to rising mortgage rates, even fewer buyers will take the plunge, especially potential first-time home buyers,” says Divoungay.
Home sales are steadily declining. The number of existing homes sold in September was a seasonally adjusted annual rate of 4.71 million homes, down 1.5% from the previous month and nearly 24% lower year-over-year, according to the National Association of Realtors.
Buyers have more “wiggle room”
With fewer buyers actively looking for a home, those who stay have more power.
In September, 17% of door-to-door sales under contract were canceled and a record 22% of owners cut list prices, according to brokerage Redfin.
The typical home spent a median of 50 days on the market in September, three days more than the previous month and a full week more than a year ago, according to Realtor.com. In March, when rates were around 4%, homes spent about 30 days on the market.
Bidding wars have also diminished. About 45% of bids to buy in August faced at least one competing bid compared to nearly 70% of bids in the first two months of the year, according to broker Redfin.
All of this means slower price growth. The median sale price for all home types in September was $384,800, down from June’s record high of $413,800, according to NAR. Compared to September 2021, however, prices were 8.5% higher.
“Those who can afford to buy in this environment have leeway,” says Divoungay.
Owners feel stuck
For most of the pandemic, landlords and sellers have had the upper hand. Now they are feeling the effects of the higher rates in several ways.
According to Kiefer, the average outstanding mortgage rate is currently 3.3%, thanks in large part to a flurry of refinancing activity over the past two years. Now that rates are up, homeowners don’t want to give up their low rates by selling and taking out a new loan for a new home.
In a recent New Home Trends Institute survey, 92% of current mortgage holders said they would not buy again if rates rose above 7%, compared to 85% who said the same at 6%. All of this means fewer homes for sale. The total number of homes for sale has declined over the past three months and in September there was only 3.2 months supply of homes at the current rate of sales, according to NAR.
“I wouldn’t be surprised if we got into a stalemate because of these rising rates from February or March until this time next year,” McLaughlin says.