Home inflation "is expected to decelerate," but higher mortgage rates will dent near-term affordability, Freddie Mac's chief economist said.
Nam Y. Huh/AP Photo
Mortgage rates swung higher last week to the highest levels since the Great Recession, putting new pressure on the still-hot housing market.
The average rate for a 30-year home loan climbed to 5.27% from 5.10% last week, Freddie Mac said in a Thursday report. That's the highest average since August 2009 and about 2.2 percentage points higher than where rates sat at the start of the year.
The average rate on 15-year mortgages rose to 4.52% through the week, up from the prior reading of 4.40%. The five-year Treasury-indexed adjustable-rate mortgage saw its average rate climb to 3.96% from 3.78%.
The rally is expected to only accelerate in the weeks ahead. The Federal Reserve raised its benchmark interest rate by 0.5 percentage points on Wednesday, doubling the size of its typical rate hikes and kicking off a more aggressive effort to cool inflation. The Fed's rate influences borrowing costs throughout the economy, and mortgage rates usually respond to hikes in a matter of days.
The Wednesday increase is likely the first of a few double-sized hikes. There was a "broad sense" among Fed officials that more half-point hikes "should be on the table" at coming meetings, Fed Chair Jerome Powell said in a Wednesday press conference. Unless new factors throw a wrench in the Fed's plans, borrowers can expect rates to skyrocket through the summer.
The Fed's actions aim to slow inflation by reining in demand, but higher rates risk pushing more Americans out of the already white-hot housing market. The mortgage payment on an average-price home with a typical 20% down payment and 30-year loan now counts for 31% of the median American's income, according to data from mortgage technology and data provider Black Knight. That's the highest share since 2007.
That pressure should abate later in 2022, but prospective buyers will have to face a higher barrier to entry until then, Sam Khater, chief economist at Freddie Mac, said in the Thursday report.
"While housing affordability and inflationary pressures pose challenges for potential buyers, house price growth will continue but is expected to decelerate in the coming months," Khater said.
Whether the market slowly cools or faces a more violent crash remains to be seen. Soaring prices and higher mortgage rates have already slammed demand. Sales of new homes fell for the fourth straight month in March, as did pending home sales. It's likely demand will wane even faster as rates tick higher.
That could be a problem for the entire economy. Homes are the average American's most valuable asset, and a sharp decline in demand could force sellers to cut their prices. That could erase swaths of household wealth, particularly among those who bought into the market when prices sat at record highs.
The latest data show prices still rising at a fast clip. But with mortgage rates on the rise and putting new pressure on affordability, the first hints at a correction have emerged.
"Sellers are starting to reduce their asking prices some, even in hot markets," Marty Green, a principal at Texas mortgage law firm Pulunsky Beitel Green, said. "While these reductions are not an indication that prices are falling, they do indicate that sellers are facing the reality that the days of the massive run up in prices from the COVID period may be coming to an end."
