High Mortgages Rate Likely to Have Long-Term Impact on Housing Market

Near term, property values face decline in 2024

A man walks along a street in a neighborhood of single-family homes in Los Angeles, Cal., on July 30, 2021. (Frederic J. Brown/AFP via Getty Images)

The U.S. housing market is currently facing a long-term impact from higher mortgage rates over the past year, which put an end to the pandemic-era real estate boom.

A July 20 report by Moody’s Analytics said that property values in the United States will possibly face a 2.4 percent decline in 2024, as mortgage rates continue to weaken the housing market.

“While maturing millennial households drive housing demand, the doubling of U.S. mortgage rates is causing notable retreats in certain markets, mainly in western states,” said the report.

The 30-year fixed mortgage rate rose over the past year, as the Federal Reserve attempted to curb high inflation, by aggressively raising interest rates ten times since March 2023, to 5.0–5.25 percent.

Although the borrowing rate does not directly affect mortgages, there is a correlation between the Fed’s moves and how the mortgage market responds, along with the changes in personal credit.

Fed Expected to Raise Interest Rates This Week

The Fed is expected to approve its eleventh rate hike at the end of its policy rate meeting on July 27, raising the borrowing rate to a range of 5.25–5.5 percent, the highest level since 2007.

Policymakers are likely to suggest another increase in September and that interest rate cuts are unlikely this year, say analysts.

“The scope for long-term rates, including certain mortgage rates, to decline as central banks begin to shift to a neutral policy stance is limited,” Moody’s noted.

This means that long-term benchmark yields are likely to remain around current levels, as long as the Fed continues to lower inflation without pushing the American economy into a serious recession.

As long as monetary policy remains tight, mortgage rates will remain above pre-pandemic levels.

However, Moody’s warned that there were additional risks for higher mortgage rates.

“In the U.S., historically wide loan spreads over benchmark rates suggest room for some additional declines in mortgage costs, but factors such as the Federal Reserve’s unwinding of its $2.5 trillion mortgage bond portfolio as part of its ongoing quantitative tightening, higher credit concerns, market volatility, or fallout from bank balance sheet stress could delay the decline in spreads vis-à-vis benchmark yields and the benefits for mortgage rates,” Moody’s noted.

Mortgage Rates Rise Close to 7 Percent in July

LendingTree in May compared the average monthly payments on 30-year fixed-rate mortgages in April 2022, when it hovered around 3.79 percent, to the same month this year, when rates were at 5.25 percent.

It found that a mortgage rate increase of only a few percentage points would add a not-too-small burden to potential homebuyers each month.

Higher rates force saw borrowers to pay higher monthly mortgage payments and potentially added as much as $75,000 over the lifetime of the 30-year loan, the study found.

“Potential homebuyers and existing homeowners needing to refinance or with variable payments now face materially larger monthly loan costs, against much more modest changes in their incomes,” said Moody’s.

Freddie Mac reported on July 20 that the average rate on the 30-year loan fell to 6.78 percent from 6.96 percent in the previous week. This was the first decline since June and the biggest one-week drop since March.

The mortgage rate will probably remain above the pre-pandemic average of 3.9 percent and is unlikely to return to those levels anytime soon.

“While mortgage rates likely will come down some in the second half of the year, there will be no return to the 3 percent rates we had during the pandemic,” Lisa Sturtevant, chief economist at Bright MLS, a regional real estate listing service, told Bankrate.

“Homebuyers have had to accept the new normal of rates around 6.5 percent or even a little higher.”

Low Housing Stock Main Factor in High Home Prices

Meanwhile, despite higher mortgage rates, home prices remain high, as potential buyers continue to face a severe inventory shortage.

The typical home sold for $382,500 during the four weeks ended July 16, up 2.1 percent from a year earlier, the biggest jump since December 2022, according to Redfin.

“There are simply not enough homes for sale,” according to National Association of Realtor chief economist Lawrence Yun. “The market can easily absorb a doubling of inventory.”

Total housing inventory registered at the end of June was at 1.08 million units, down 13.6 percent from a year ago, at 1.25 million, said NAR.

Unsold inventory is at a 3.1-month supply at the current sales pace, up from three months in May and 2.9 months in June 2022.

Realtor.com reported recently that the number of available homes on the market in June was down more than 47 percent from the typical amount before the pandemic began in early 2020.

“We will be in a pretty low [housing] inventory environment for years,” Ms. Sturtevant told Realtor.com, who added that the shortage will only ease if mortgage rates go down.

“But I still believe it’s going to be very, very tight, she added.”

Much of the reason why the availability of housing is low is because homeowners who bought their homes at a low rate before the pandemic are reluctant to sell with rates stuck at near a two-decade-high.

Only 14 of every 1,000 homes changed hands in the first half of 2023, compared to 19 of every 1,000 during the same period in 2019, according to Redfin.

“The quick increase in mortgage rates created an uphill battle for many Americans who want to buy a home by locking up inventory and making the homes that do hit the market too expensive. The typical home is selling for about 40 percent more than before the pandemic,” said Redfin deputy chief economist Taylor Marr.

New housing stock is also not keeping up fast enough with the pace of demand, adding further pressure on the market.

Single-family housing starts fell 7 percent from May levels last month, from 1.005 million units to  935,000 units, according to the U.S. Census Bureau.