Mortgage rates are constantly increasing. The 30-year fixed-rate mortgage rose above 7% for the first time this year, Freddie Mac said yesterday along with its weekly reading. Mortgage rates increased from 6.88% to 7.10% this week. Daily mortgage rates are higher, and at the latest reading, the average 30-year fixed rate is 7.44%.
For some time mortgage rates were falling because inflation was falling. But things have changed, after several warmer-than-expected consumer price index reports, and the market that once priced in three interest rate cuts this year appears to have adjusted to a new reality.
“As the latest CPI data beat recent forecasts, the importance of waiting for clearer signs of easing inflation before making any rate cuts has increased,” Realtor.com economist Jiayi Xu wrote yesterday following the news, later adding, “We will continue to live in a prolonged period of high rates and face high borrowing costs, including high mortgage rates, which topped 7% for the first time this year.”
Earlier this week, at a policy forum, Federal Reserve Chair Jerome Powell appeared to put an end to dreams of cuts; he said, “at this time, given the strength of the labor market and the progress made so far on inflation, it is appropriate to give the restrictive policy additional time to work.” Powell said he will keep interest rates at their current level for as long as necessary.
“It appears increasingly likely that mortgage rates will not fall anytime soon,” Bright MLS chief economist Dr. Lisa Sturtevant said in a note. “We will likely see rates near 7% throughout the spring and between 6% and 6% in the summer.”
The point is this: If you own your home outright, high mortgage rates don’t really matter. If you’re a baby boomer or an older generation, 7% mortgage rates probably don’t seem so bad either. After all, they were at 18% in 1981. But in this real estate cycle, mortgage rates have risen to 7% after years of historically low rates: During the pandemic, for a period of time, mortgage rates were below 3%. Separately, home prices have skyrocketed, rising more than 50% since the start of the pandemic. However, consider the difference between a 3% rate, or even a 5% rate (like those from just two years ago), and a 7% rate.
If you’re buying a $600,000 home, assuming you put down 20%, a $480,000 loan with a 3% mortgage rate would mean a monthly payment of $2,024; same circumstances but with a 5% mortgage rate would equate to a monthly payment of $2,577; and at a 7% rate, it would be $3,193.
And this difference is why people stopped selling their homes and others stopped buying them. Last year, existing home sales fell to a nearly three-decade low due to the lock-in effect. The latest available data shows that existing home sales also fell on a monthly and annual basis in March. “Home sales are stalled because interest rates have made no big moves,” NAR chief economist Lawrence Yun said in a statement accompanying the release. So it looks like it will continue to happen.
A recent survey of sellers conducted by Realtor.com found that nearly 80% of potential sellers already feel stuck in their home because they don’t want to give up the low mortgage rate. “Although the percentage of ‘locked-in’ homeowners is three percentage points lower than last year, today’s mortgage rates are negatively impacting seller confidence,” wrote Hannah Jones, senior economic research analyst at Realtor.com. It appears that this will only continue to occur as long as mortgage rates remain high.