Comment on this story
comment
Mortgage rates topped 7 percent this week, the highest level in 20 years — and the latest sign that the Federal Reserve’s aggressive measures to slow the broader economy are already hitting the housing market hard.
The average interest rate on a 30-year fixed-rate mortgage, the most popular home loan product, hit 7.08 percent, according to data released Thursday by Freddie Mac. The last time mortgage rates climbed this high was in April 2002, and they’re expected to keep going like the Fed moving fast to tame a scorching housing market, an important step in reducing rental costs and ultimately suppressing inflation in the overall economy.
The central bank does not directly set mortgage costs, but changes them Its policy rate — known as the Federal Funds Rate — spreads throughout the economy, affecting all forms of lending. Since March, the Fed has hiked interest rates five times, bringing its benchmark rate from near zero to between 3 and 3.25 percent. The central bank is expected to hike rates another 0.75 percentage point next week.
Calculate how much more mortgages will cost if interest rates rise
These moves have already had major ramifications for the housing market, and the rise in mortgage rates has prompted some to do so general concerns that the Fed is using far too much force to slow down the economy.
“People can say, ‘Well, you know, one percent [added] on the mortgage rate is still low.’ But we had several percent on the mortgage rate in a short period of time,” said Diane Swonk, chief economist at KPMG. “The rapid pace at which they are raising rates is in and of itself destabilizing.”
Post reporters Damian Paletta and Rachel Siegal explain how economic downturns begin. (Video: Hope Davison, Drea Cornejo/The Washington Post, Photo: Michael S. Williamson/The Washington Post)
The average mortgage rate has risen at a staggering rate. A year ago it was 3.09 percent; In March, the average interest rate for a 30-year fixed-rate mortgage was still below 4 percent. The increase from 3.22 percent in January to 7.08 percent now, a jump of 3.86 percentage points, is the steepest rate of increase in a year. The previous record was 3.59 percentage points in 1981.
Prices rose again in September, prompting further rate hikes
For much of the pandemic, low interest rates meant aspiring home buyers flocked to the market to compete for the few homes available, sending prices soaring. But now that they’re wary of spending hundreds of dollars more a month on a mortgage, buyers are backing out, increasing the supply of available homes and helping prices fall overall. That year, when interest rates were below 4 percent, a family with a median household income of $71,000 could afford a $448,700 home with a 20 percent down payment. This week, with rates down 7 percent, they could only afford a $339,200 home, according to Realtor.com.
Real estate prices are falling at record speed. The Case-Shiller Home Price Index, released earlier this week, showed prices in August were 13 percent higher than a year ago, compared with 15.6 percent higher the previous month. The 2.6 percentage point difference between those two months is the largest drop in the history of the index, which was launched in 1987.
Zillow announced Wednesday that it had laid off 300 employees in several departments, including home loan and closing services, although the company said there was no hiring freeze.
Demand for mortgages has fallen just as quickly as interest rates have soared. Overall application volume is at its lowest level since 1997, according to the Mortgage Bankers Association. Refinancings are down 86 percent from a year ago, and mortgage lenders across the country, including the big banks, have been laying off staff as the market slows . And rising interest rates have increased interest in adjustable rate mortgages. The ARM share of the applications was 12.7 percent.
Home builders are also trapped. Total housing starts fell 8.1 percent in September to a seasonally adjusted annualized rate of 1.44 million units. So far this year Single-family homes are down 5.6 percent compared to this point last year.
Homebuilder confidence also fell in October for the tenth straight month, falling to its lowest level since 2012, excluding the two-month period in spring 2020 when the pandemic started. It’s half what it was six months ago.
“This will be the first year since 2011 that single-family home counts have declined,” Robert Dietz, chief economist for the National Association of Home Builders, said in a statement. “And amid expectations of continued interest rate hikes from Federal Reserve action, single-family housing is projected to decline further in 2023 as the housing contraction continues.”
Still, the Fed’s tools are limited, and officials routinely point to the housing market as one of the clearest signs that its rate hikes are having the intended effect.
“We’re starting to see some adjustment to excess demand in rate-sensitive sectors like housing,” Fed Governor Christopher Waller said in a speech this month. “But more needs to be done to reduce inflation in a meaningful and sustainable way.”
When or how the Fed’s rate hikes will overtake inflation elsewhere in the economy is not yet clear. Rate hikes are designed to wipe out demand, but they do nothing to solve supply-side problems, such as shortages of oil and gas, affordable housing, or chips for new cars. Overall, consumer prices remain stubbornly high, rising 8.2 percent year-on-year in September.
Rental costs have also risen by 7.2 percent in the past year, as have rents rose by 0.8 percent from August to September. Goldman Sachs has forecast headline housing inflation to peak next spring at 7.5 percent, before slowly slowing to just under 6 percent in late 2023. This has significant implications for Fed policy, since housing costs make up a large part of the basket used to measure inflation in the economy.
As the Fed fights inflation, concerns are growing that it is over-correcting
But the declining housing market could finally cool down rental prices. According to Realtor.com, national rental growth slowed to its slowest annual pace (7.8 percent) since June 2021. The US median rent recorded its second monthly decline in eight months in September.
The rise in mortgage rates is holding back the market even where it was red-hot during the pandemic. In 2020 and 2021, sales prices in the Hudson Valley skyrocketed as transplants from New York City and elsewhere clamored for the few homes available. But with mortgage rates now soaring, the number of homes available has more than doubled over the past three months, going from about 150 units to about 380, said Ryan Basten, an associate broker at Berkshire Hathaway HomeServices Nutshell Realty.
This is an encouraging sign that the market is returning to some version of normalcy. But Basten said there was a lot of uncertainty about the future. He went through recent jumps in mortgage rates: 5 percent “wasn’t that bad,” he said, and 6 Percent was “workable”. But with the Fed poised to raise rates twice more before the end of the year, Basten said he and others in the industry “wonder if there’s going to be a real downturn in the market.”
“We can only deal with what we are dealing with now. I can’t imagine mortgage rates going up to 10 [percent]. If they did, it would feel like a recession,” Basten said. “Eight [percent] feels bad. Ten percent would say, “Wow, where do we go from here?” ”