Anyone hoping to buy a house this year better buckle up. Mortgage rates just reached a 22-year high.
Freddie Mac, a government-sponsored enterprise, publishes a weekly average rate based on a survey of mortgage applications throughout the country. This week, Freddie’s average rate hit 7.23% (the last time it was this high was back in July 2001). And we probably haven't seen the highest rates yet this year: Some housing market experts think they could go as high as 8% by the end of 2023, according to Realtor.com.
Of course, some borrowers are already seeing rates that high. After all, Freddie Mac’s average is the absolute best a borrower with excellent credit (800+), a 20% down payment in the bank, and a fantastic debt-to-income ratio can expect. For those of us who are nowhere near those lofty standards, rates are already close to, if not above, 8%.
In the long run, mortgage rates should eventually start to move lower, says Danielle Hale, chief economist at Realtor.com, but it’s impossible to predict when that will happen. In the meantime, she tells me, “Home shoppers have to operate in an environment in which rates can move either higher or lower.”
Worse yet, the lack of affordability we’re currently experiencing is going to “continue to be a top concern,” Hale says.
For one, the “lock-in” effect felt by potential home sellers who bought at or refinanced into a 3% (or below) rate will become even more entrenched. If a homeowner isn’t comfortable swapping a 3% rate for a 7% one, they’ll be even less enthusiastic about 8%.
If potential sellers decide to stay put, the housing supply of available homes will continue to shrink. And that means home prices will remain stable at best, and at worst, continue to rise — which is beginning to look more and more likely.
The listing site Zillow is now forecasting that home prices will increase 6.5% by next July. The median existing-home price (including all types of housing) would increase from $406,700 to $433,135.
That’s all well and good for homeowners, who will gain a substantial amount of equity if this scenario plays out; for buyers … not so much. As Money reporter Brenden Rearick writes, we’re now in a “vicious cycle” where “owners don’t sell to avoid taking on higher mortgage rates and the lack of inventory pushes . . . home prices still upward.”
The biggest losers in this scenario are first-time homebuyers. High mortgage rates require a large enough income to cover an expensive monthly payment, and high home prices require a hefty cash reserve to put towards a down payment. These are conditions every homebuyer faces, but first-timers don’t have the newly-gained home equity current homeowners are benefiting from.
Whether the forecast for higher prices comes true depends on many factors, like the Federal Reserve’s policy on interest rate hikes moving forward, buyer demand and whether or not the U.S. economy will avoid a deep recession. But the takeaway is the same as it’s been for months: Home prices are a far cry from tumbling down, and anyone who wants to buy over the next year or so better have their finances in order. And a little luck on their side.
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