On the precipice of the hotly anticipated spring housing market, the US Federal Reserve just dealt homebuyers another crushing blow.
Jerome Powell, chair of the Federal Reserve, told Congress on Tuesday that more aggressive interest rates might be needed to cool inflation. And while mortgage interest rates are separate from the Fed’s short-term rates, they often follow the same trajectory. Those higher rates have hit homebuyers where it hurts: their budgets.
In response to Powell’s comments, mortgage rates hit 7.03% for 30-year fixed-rate loans on Tuesday afternoon, according to Mortgage News Daily. Those higher rates are in part responsible for today’s buyers paying more than 50% a month in their mortgage payments than they would have a year ago.*
“That’s a boomer for buyers who had their hopes raised that rates would be falling,” says Realtor.com® Chief Economist Danielle Hale. “It’s going to be a more challenging spring than some people were expecting.”
Less than two months ago, there was speculation that rates would fall below 6%. Buyers had returned to the market, and bidding wars had heated up again. But the higher rates could threaten the rebound.
“It will continue to be a damper on how much home shoppers can afford. Sellers are going to need to be mindful of that,” says Hale. “There are probably going to be a few buyers in the market, and the buyers who are in the market probably won’t be able to bid as high as they would have over the last few years.”
An increase of even a single percentage point can add up to a lots of money over the life of the mortgage loan. For example, the difference between 6.03% and 7.03% equals a $219 increase in a buyer’s monthly mortgage payment for a median-priced home. That adds up to nearly $79,000 over the life of a 30-year loan. (This assumes a 20% down payment on a home with the national median price of $414,950 in February, according to the most recent Realtor.com data.)
In the short term, Hale expects rates will bounce between the high 6% to 7.5% range. She didn’t anticipate they would top 8%.
“It’s going to be a more challenging spring than some people were expecting,” says Hale.
There is a bright spot in the financial markets, though, that could keep a lid on rates. When the stock market is volatile, or falls like it did on Tuesday, more investors sink their money into US Treasury bonds and mortgage-backed securities, aka mortgage bonds, which are perceived to be safer investments. The securities are bundles of mortgages that lenders sell to investors to free up capital to make new loans.
When there is more demand for mortgage bonds, like there was after Powell’s comments on Tuesday, prices for bonds increased. And then mortgage rates typically fall.
While higher rates might slow the spring market, they aren’t expected to stop it in its tracks.
“It might delay the recovery in the housing market that we had started to see,” says Hale. “But I don’t think things will get worse from here. It will just take longer to gain the momentum behind that rebound.”
* The calculation uses the national median list prices in February 2023 compared to February 2022 for homes where the buyer has put down 20%. It also factors in average mortgage rates on March 7, 2023, compared with March 8, 2022, using Mortgage News Daily data for 30-year fixed-rate loans. It does not include property taxes, homeowners insurance or other costs.