The U.S. housing market is experiencing a significant slowdown as mortgage rates have surged above 7 percent for the first time this year, hitting 7.1 percent this week according to Freddie Mac. This marks the highest rate since last November and nears the peak of nearly 8 percent observed in late 2022—a rate not seen since the year 2000. This rise in rates serves as a symbolic red flag, potentially sidelining millions of would-be home buyers and sellers from the market.
The impact of these increased rates is twofold: it not only makes homeownership more expensive for prospective buyers but also discourages potential sellers who are hesitant to give up their current lower rates. This reluctance to sell is exacerbating the shortage of available housing, inadvertently driving prices upward even as demand wanes.
The National Association of Realtors (NAR) reported a decline in sales of existing homes by 4.3 percent in March, with a year-over-year drop of 3.7 percent. This downturn reflects broader economic frustrations, underscored by an inflation rate that remains persistently above the Federal Reserve’s 2 percent target, despite having cooled from last year’s highs.
In historical context, today’s mortgage rates starkly contrast the roughly 3 percent rates seen in April 2021. The uptick began later that year and escalated in 2022 as the Federal Reserve initiated a series of rate hikes to temper rising inflation. Despite these efforts, with inflation still above target, the Fed has indicated that high borrowing costs may persist, reinforcing expectations of continued high rates.
This expectation has influenced the bond market, particularly the 10-year Treasury yield, which closely correlates with mortgage rates. The yield on these bonds has climbed significantly since the start of the year, currently standing at about 4.6 percent.
In response to the housing market’s challenges, the NAR recently agreed to settle litigation that will eliminate the standard sales commission paid to real estate agents, which typically ranges from 5 to 6 percent. This cost has traditionally been passed on to buyers, contributing to higher home prices. The elimination of this fee could potentially lower costs for home buyers, offering a silver lining amid rising mortgage rates.
Looking ahead, the trajectory of the housing market remains uncertain. Freddie Mac’s chief economist, Sam Khater, suggests that potential home buyers are caught in a dilemma: either to purchase now before rates climb further or wait in hopes of a decrease later this year. This decision is made all the more difficult by a market that is already less accessible due to higher rates.
The interplay between rising mortgage rates, stubborn inflation, and regulatory changes in the real estate industry points to a period of adjustment and potential opportunity within the U.S. housing market. How this will resolve depends largely on future economic conditions and Federal Reserve policies. As the landscape evolves, both buyers and sellers must navigate these changes carefully to make informed decisions in a shifting market.