Titan Properties USA

Mortgage rates have been trending upward since last March when the Federal Reserve began tightening the reins on inflation. Last November, they even hit a 20-year high, clocking in at over 7% on the typical 30-year loan. Now, less than a year later, they’ve broken that record again, notching yet another two-decade high at 7.23% as of Aug. 24. 

Historically, that’s not the highest rate we’ve ever seen, but compared to the record-low rates of just two years ago, it’s quite the about-face for anyone looking to buy a house. In fact, according to Redfin, as of July 30 the typical homebuyer’s monthly mortgage payment is now up 19% compared to just a year ago.

The question is this: How much worse can it get? And is there any hope for lower rates on the horizon? Here’s the scoop.

A Double Whammy for Buyers

If you’re looking to purchase a property anytime soon, high mortgage rates only add to an already challenging situation. For one, inventory is incredibly low, and with 80% of homeowners having a current mortgage rate of 5% or less, according to Zillow, the likelihood of much existing inventory hitting the market is pretty low—at least until rates drop some.

According to a recent Zillow survey, homeowners with rates under 5% are half as likely to sell their homes as those with rates above that threshold, essentially locking up a good portion of that existing inventory. (Total for-sale inventory fell 19% in July, according to Redfin, and new listings were down over 20%.) 

This, of course, trickles down to home prices. With such low inventory, buyers are forced to compete for the few options out there—keeping prices elevated until something finally shifts. 

According to the most recent Real House Price Index from First American, consumer homebuying power, defined as how much one can buy based on changes in income and mortgage rates, has now dropped 9% year over year. In addition, “real” home prices, which take into account mortgage rates and nominal home prices, are up a whopping 12% in the same period. 

As Mark Fleming, chief economist for First American, put it: “While many expected that a higher mortgage rate environment would prompt house prices to adjust downward, the lack of housing inventory amid a resilient economy is keeping a floor on how low prices can go.”

What’s Next?

We’re nearing the housing market’s slow season of winter and the holiday season, which is when home prices normally drop and competition wanes. According to most forecasts, we’re likely nearing the peak for rates, too. 

Fannie Mae’s latest forecast says the 30-year fixed-rate mortgage rate will dip to 6.6% by year’s end, while the Mortgage Bankers Association has its sights on a 6.2% average rate. Either way, it’d be an improvement for those looking to get in on the market—if they can find a property.

The trajectory of rates over the next few months will depend on what the latest economic indicators say, as well as how the Federal Reserve responds to them. As of now, the CME Group’s Fed Watch Tool shows there’s an around 80% chance that the Fed makes no changes to its benchmark rate next month. If that’s the case, rates could moderate or even drop later on in the year.

As for 2024, both Fannie and MBA expect a steady downtrend in rates, with MBA eyeing the lowest rate of the two—an average of 5%—by the end of the year. By 2025, we could see rates in the 4% range, according to the trade group. 

Until then, though, homebuyers and real estate investors will have to make do with rates that are quite a bit higher than just a year or two ago. That means getting creative with financing (adjustable-rate and shorter-term loans), negotiating buydowns, or using equity to make bigger down payments and, hopefully, qualify for a lower rate.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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