Rising mortgage rates threaten to prolong the housing market slump, making homes less affordable and hindering sales. Experts warn of continued volatility and potential affordability crisis.
Mortgage rates have crept back over 7% to start the new year in a potentially troublesome development for the housing market that has struggled under the weight of higher interest rates for two years. The average rate on a 30-year, fixed-rate mortgage climbed to 7.04%, according to Freddie Mac. It is the first time rates had climbed above 7% since May and hit a figure that adds to problems with affordability that have hammered the housing market for the last two years.
Prices have continued to climb despite slower sales volume, posting 17 consecutive months of year-over-year increases for existing homes to an eye-popping sum of $406,100 as of November, according to the National Association of Realtors. On top of high prices and interest rates, other costs of homeownership have climbed dramatically since the pandemic-era market boom. Property taxes have skyrocketed with the rapid uptick in home values and as severe weather becomes more common and destructive, increasing rates across the board as insurers spread out the risk throughout their pool of clients. The nationwide average premium on owner-occupied homeowners’ insurance rose about 11% in 2023, according to research by S&P Global. Added together, all the costs of owning a home have created one of the most unaffordable periods in American history and produced a housing affordability crisis, particularly in areas with a high cost of living. The increase in interest rates to start the year is raising concerns about whether the housing market will be able to break out of its slump. Existing home sales for 2024 are on pace to finish at the lowest level since 1995 for a second consecutive year and 7% mortgage rates bring little optimism about changes in buyer behavior to start 2025. Most economists and housing analysts are expecting rates to remain elevated and volatile throughout 2025 with inflation lingering, the Federal Reserve to its benchmark rate and the unknowns of the incoming Trump administration’s economic agenda that have spurred fears of inflation from tax cuts and tariffs on imports. The Fed cut its benchmark interest rate three times last year but is now in a waiting period as it waits to see what happens with inflation and government outlays in the year to come. Officials also dialed back the number of further cuts they expected for 2025 with inflation over its 2% target and an economy that has chugged along with low unemployment and steady growth. The Fed’s benchmark rate does not directly impact mortgage rates, which instead tend to follow the yield on 10-year Treasury bonds. Yields have been on the rise in recent weeks as investors react to the news of fewer rate cuts from the Fed and have concerns about inflation and other economic factors. “Bond yields in the U.S. and abroad continued to move higher in response to concerns over a sticky inflation outlook and still too-high budget deficits, which pushed mortgage rates higher for the fifth consecutive week,” said Joel Kan, vice president and deputy chief economist at the Mortgage Bankers Association. What happens moving forward with mortgage rates will be vital to the housing market’s recovery. Slight shifts in rates in 2024 have prompted short-lived rushes of sales, including in October when the market posted its first gain in more than three years. An open question moving forward is what level of mortgage rates will be acceptable or affordable for buyers on the sidelines. Just a couple percentage points on a loan the size of a mortgage can mean the difference of hundreds of dollars on a monthly payment and hundreds of thousands over the span of a 30-year loan. “For those people who are hoping the interest rates are going to come back down to the low single digits, I think they're going to be waiting forever. I don't think that's happening,” said Keith Munsell, head of the real estate concentration at Boston University’s Questrom School of Business. High rates have also suppressed the level of supply on the existing home market as homeowners opt to stay put instead of moving to a different area or upgraded home due to the “lock-in effect” of having a low mortgage rate through purchasing or refinancing during the pandemic when rates sat around 3%. Supply has favored sellers for years with a shortage of homes available to purchase, which has kept prices moving upward even though the market is expected to set two 20-year lows in a row. Inventory sat at the equivalent of 3.8 months’ supply at the end of November, and a five- to six-month supply is considered balanced
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