The US Federal Reserve increased its benchmark rate by 0.25 percentage point on Wednesday, as most Wall Street economists anticipated.
This marks the 11th rate hike out of the last 12 Federal Reserve meetings. The new benchmark rate has reached 5.25%-5.5%, the highest level in 22 years.
Increasing interest rates lead to higher housing costs, reducing affordability for potential homebuyers. These higher rates deter house sales as prospective home sellers avoid entering the housing market.
Demand Remains Steady
Despite the increased rates, demand for homes remains steady as buyers adapt to the new higher-rate environment. However, the housing market faces a significant challenge as the number of properties available for house sales has reached a record low, with less than one million single-family homes listed on the market.
This scarcity is primarily caused by the majority of homeowners currently holding 30-year mortgages, which have substantially lower interest rates compared to the current market rates of around 7%. As a result, many homeowners are reluctant to sell their properties since buying another home would mean acquiring a new mortgage with significantly higher interest rates.
Early Impact of Mortgage Rate Rise
As of Wednesday morning, the 30-year mortgage rate averaged 7.04%, as reported by Mortgage News Daily. However, the higher rates seem to be impacting the number of people buying homes with mortgages, as mortgage purchase applications declined by 2.5%, according to data from the Mortgage Bankers Association.
The Atlanta Fed has noted that the combination of elevated interest rates and soaring home prices nationwide has significantly increased the cost of homeownership compared to the same period the previous year.
For a family earning a median annual income of approximately $76,000. Purchasing a home at the median price of $357,000 would require them to allocate 41% of their income towards housing expenses, based on calculations made by the Federal Reserve. Homeownership costs have surged, making it a considerable financial burden for families with median incomes.
Experts in the housing market advise potential homebuyers to temper their expectations concerning mortgage rates, urging them not to anticipate a return to the ultra-low rates experienced during the pandemic, which were as low as 3%.
The good news is that mortgage rates are predicted to decrease over the next few years, offering some relief to homeowners and potential homebuyers.
However, it’s important to note that the rates are not expected to reach the record-low level of 2.71% seen in December 2020. According to Fannie Mae’s July housing forecast, they anticipate the 30-year mortgage rate to drop below 6% by the end of 2024.
While this forecast might be disappointing for some hoping for rates to return to extremely low levels, there is a positive aspect to consider.
How low the rates can go?
To entice people back into the property market, Americans must adjust their expectations regarding mortgage rates. The unrealistic desire for rates as low as 3% needs to be set aside, as it does not reflect the current reality.
Instead, a healthy real estate market, similar to the period between 2015 and 2019, would be characterized by mortgage rates ranging from 3% to 5%. This range was considered favorable, with buyers finding it affordable and attractive.
A more practical and helpful range for the 30-year fixed rate, as suggested by Matthew Ricci, a home-loan specialist at Churchill Mortgage, would be between 4.75% to 5.25%. Within this range, there is a higher likelihood of an increase in housing inventory. This could benefit prospective homebuyers and increase house sales.
How much mortgage rate can encourage house sales?
Conversely, for homeowners who do not plan to purchase another property with all cash, certain conditions must be met to sell their homes and for new listings to rise.
Many homeowners utilize the proceeds from home sales to fund the purchase of a new house. However, first-time buyers do not have that advantage and will have to secure a significant mortgage, possibly in the six-figure range, at a 7% interest rate.
As mortgage rates approach the 6% mark, there is an expectation that new listing activity will begin to show signs of increase during the second half of the year.
A survey conducted by the company, which involved more than 1,300 homeowners and renters, revealed that 71% of potential homebuyers who intend to finance their next home with a mortgage are unwilling to consider a rate exceeding 5.5%. Furthermore, 62% of respondents believed a “historically normal mortgage rate” should be lower than 5.5%.
This potential uptick in listing activity is likely due to homeowners recognizing the opportunity to take advantage of the favorable selling conditions before rates climb even higher.