Because of high mortgage rates, rising home prices, and limited housing inventory, overall housing market activity remains poor, sustaining the housing affordability dilemma. At the same time, high inflation and further interest rate hikes loom.
Mortgage rates shot up in mid-July and haven’t looked back since, with the average 30-year fixed rate reaching 7.23% the week of August 24. This is the highest rate since March 2022, and it comes after Federal Reserve policymakers voted to raise the federal funds rate by 25 basis points at the committee’s July meeting—the 11th rate hike since the Fed began fighting inflation in March 2022.
The federal funds rate is the overnight lending rate between financial institutions.
A rate hike by the Fed has an indirect impact on long-term house loans, such as 30-year fixed-rate mortgages. When the Fed began hiking rates in March 2022, the federal funds rate was near zero. After 11 rate hikes, the current rate range is 5.25% to 5.5%.
And the Fed has often stated that it will not stop there.
Fed Leaves Door Open for Another Rate Hike
Following the Fed’s 25-basis-point rate hike in July, average 30-year fixed mortgage rates have steadily risen this month.
According to Fed predictions, the federal funds rate will reach 5.6% by the end of 2023, meaning at least one more rate hike this year. As a result, many analysts predict that mortgage rates will continue considerably above 6% for the rest of the year.
Meanwhile, all eyes are on the Fed’s September 20-21 meeting, where committee members will evaluate the most recent economic statistics to inform its monetary policy position and decide whether to hold rates steady—or raise them.
When Will The Housing Market Recover?
Gumbinger believes that three conditions must be met before a housing rebound can start.
Of course, interest rates would have to fall.
But, according to Gumbinger, don’t expect them to cool down too quickly. Rapidly lowering interest rates may cause a spike of demand that cancels out any inventory increases, causing property prices to rise.
He goes on to say that mortgage rates returning to a more “normal” upper 4% to lower 5% range would also assist the housing market return to 2014-2019 levels over time.
However, Gumbinger believes it will be some time before we see such rates again.
With the average 30-year fixed mortgage rate safely above 7%, a 5% mortgage rate appears to be a pipe dream.
Despite rising interest rates, mortgage originations increased to $393 billion in the second quarter of 2023, up from $344 billion in the first quarter—the lowest number since the second quarter of 2014.
Nonetheless, housing analysts predict that originations will remain subdued for the rest of 2023. According to the National Association of Realtors, existing-home sales were down 16.6% from July 2022. Except for a modest increase in April, year-over-year home sales have been trending downward since February of this year. Pending house sales, a leading indicator for existing-home sales, increased by 0.9%.
The mortgage spread now is roughly 300 basis points (the difference between the 10-year Treasury bond yield and the 30-year fixed rate mortgage). Given previous tendencies, the spread should be in the 150-200 basis point range. Yun anticipates that mortgage rates will decline to roughly 6% by the end of 2023 as the spread normalizes.
In other words, the average first-time home buyer does not earn enough to qualify for a mortgage.
Are Home Prices Beginning to Drop?
Despite signs that home prices are beginning to fall in some areas, the housing affordability crisis is likely to persist due to a limited housing supply, persistently high mortgage rates, and sales prices that are approaching the record-high median existing-home sales price of $413,800 in June 2022.
According to NAR, the median existing-home sales price fell from $410,200 to $406,700 between June and July, but gained 1.9% year on year.
According to a Redfin analysis, first-time home buyers will need to earn approximately $64,500 per year, which is 13% higher than a year ago. In June, the average price of a starter house reached an all-time high of $243,000 for the first time.
According to the Realtor.com and NAR Home Affordability & Supply Report, those earning $75,000 per year may afford a $256,000 home, yet homes at this price or less accounted for only 23% of existing home listings in April.