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What’s Up?... Mortgage Rates, That’s What — Mortgage rates in the US now sit at their highest levels since 2008, climbing for the 3rd week in a row. Your run-of-the-mill 30-year loan will now cost about 5.9%, according to weekly data released by Freddie Mac.
While this pales in comparison to the 16% rate your boomer-grandfather paid in 1980, that was back when he could buy a 3-bedroom house for $80k. Times have changed, and home prices have soared more than 10x during that time.
Now, paying 6% a month on a $1mn Manhattan starter home is unreasonable for most people and is squeezing many millennials out of the housing market.
Part of the culprit for the rise in rates is the Federal Reserve’s recent hawkish position. While the Fed does not directly influence mortgage rates, monetary policy indirectly does.
When the Fed raises rates, making it more expensive for banks to borrow, the higher cost gets passed to consumers (homebuyers). Typically, there is an inverse relationship between mortgage rates and home prices, providing buyers some relief in a rising rate environment.
However, a confluence of factors, including a sharp increase in demand post-pandemic combined with a housing inventory that is well below pre-pandemic levels, have kept housing prices propped up despite higher rates.
Potential homebuyers might be starting to see early signs of relief, though, as activity is slowly contracting. Among 148 large regional housing markets, 98 have seen home values fall from their peak, with the largest drops occurring in high-cost cities such as San Francisco and Seattle, both down 8% from their peaks.
It will be interesting to see how this market compares to the last housing recession in 2005-07, when home prices didn’t fall until inventory levels increased dramatically.
While that doesn’t seem to be happening anytime soon, more people are getting priced out of the market, which could force a massive reset across the country.
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