A sharp rise in mortgage rates has sparked speculation about a possible slowdown in house prices in the blistering US market, with real estate research firm Zillow slashing its 2023 house price forecast by 1.6 percentage points.
Home prices are on the rise amid broader inflationary pressures in the U.S. economy, with the latest S&P Corelogic Case-Shiller Index showing a 19.2 percent year-on-year rise in home prices in January, the fourth-highest reading in the 35-year period the data series.
But a rapidly evolving macroeconomic environment, with rising inflation prompting the Federal Reserve to embark on a tightening path to cool runaway prices, is fueling speculation that home price momentum will falter.
“Declining COVID cases and a resumption of general economic activity have fueled inflation and the Federal Reserve has begun raising interest rates in response. We may soon see the impact of rising mortgage rates on home prices,” Craig J. Lazzara, managing director at S&P DJI, said in a statement.
Faster rate hikes “on the table”
The Fed raised interest rates by 25 basis points in March, and Federal Reserve Chair Jerome Powell said Thursday a half-point rate hike was “on the table” when policymakers meet in May.
Powell added it would be appropriate to “move a little faster” to tighten monetary policy as the central bank scrambles to contain inflation, which is at a 41-year high.
Treasury bond yields, which tend to track mortgage rates, have risen sharply of late, with the 10-year hitting 2.94 percent on Tuesday, the highest since 2018.
A year ago, the benchmark for 30-year mortgages was 2.97 percent. This week, mortgage buyer Freddie Mac reported it was up 5.11 percent, a 12-year high.
The rise in interest rates has caused demand for mortgage refinancing to fall 68 percent year-on-year and 8 percent from the previous week, according to the Mortgage Bankers Association (MBA).
“The recent rise in mortgage rates has left most borrowers out of interest/maturity refinancing, causing the refinancing index to fall for the sixth straight week,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting , in a statement.
“In a housing market confronted with affordability issues and low inventories, higher interest rates are causing demand for home purchases to fall or lag,” Kan added.
Rising mortgage rates have prompted real estate research firm Zillow to downgrade its forecast of how quickly house prices will rise over the next year.
Zillow’s full-year forecast of 16.5 percent annualized home price growth in February was downgraded to 14.9 percent.
The downwardly revised forecast is being driven by affordability headwinds, which have intensified faster than expected, mainly due to the sharp rise in mortgage rates,” the Zillow researchers said in a statement, adding that there are downside risks for the give prospects.
“Inventory levels remain near record lows but have the potential to recover faster than expected, which could lower future price and sales volume forecasts,” they said.
Other housing market data points to a potential slowdown in the future.
Stock edges up
US single-family housing construction and permits slumped in March, the Commerce Department said on Tuesday, while a report on Monday showed that sentiment among single-family home builders fell to a seven-month low in April.
March saw a 2 month supply of home inventory at the current sales pace, up from 1.7 months in February, according to the National Association of Realtors. Experts say there is a balanced market when the supply is around 6.5 months.
Amid expectations that mortgage rates will continue to rise, Lawrence Yun, NAR’s chief economist, is forecasting a 10 percent drop in home purchase transactions this year, along with some rebalancing of home prices.
“The housing market is beginning to feel the effects of sharply rising mortgage rates and higher inflation, which are hurting purchasing power,” Yun said. “Yet homes are selling fast and house price gains remain in the double digits.”
The median price for a previously occupied home rose 15 percent year over year to $375,300, according to NAR, hitting a new record high.
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Tom Ozimek has a broad background in journalism, deposit insurance, marketing and communications, and adult education. The best writing advice he’s ever heard comes from Roy Peter Clark: “Hit your target” and “leave the best for last.”