Thursday, March 24, 2022

An economic shock just hit the housing market

When the pandemic struck two years ago, the Federal Reserve used nearly every lever at its disposal to combat the COVID-19 recession. That included cutting its benchmark interest rate to zero. Lower interest rates incentivized businesses to invest and borrow cheap money. It also encouraged buyers—enticed by record low mortgage rates—to jump into the housing market. The Federal Reserve has moved its focus from helping the economy recover to getting inflation under control. Last week, the central bank raised rates for the first time since 2018. In anticipation of the hike, the average 30-year fixed mortgage rate spiked from 3.11% in December to 4.16% as of last week. 

The real estate industry knew higher mortgage rates were coming—but they didn't expect it to be this high. Indeed, heading into the year, Fannie Mae predicted that the 30-year fixed mortgage rate would average 3.3% in 2022 and 3.5% in 2023. Industry insiders told Fortune that this swift move up in mortgage rates amounts to an economic shock. For example, a borrower who took on a $500,000 mortgage at a 3.11% rate would get a monthly mortgage payment of $2,138. At a 4.16% rate, that jumps to $2,433. If rates this week do cross 4.5%, that payment soars to $2,533. 

Not only do higher rates mean buyers' monthly mortgage payments rise, it also will result in some buyers losing their mortgage eligibility. One of the industry's fears is that home price growth remains at an unsustainable level and leads to an overheated market. After all, home price growth can't outpace income growth forever. At its latest reading, year-over-year home price growth was still increasing six times greater the rate of incomes. "Rising mortgage rates could eventually be good for housing by trying to bring the market back to a healthy place, but there will likely be some inequality collateral damage along the way," Wolf told Fortune.


https://fortune.com/2022/03/23/housing-market-interest-rate-economic-shock/
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5 comments:

  1. Ulanbek AlmazbekovMarch 25, 2022 at 9:29 PM

    With the current inflation rate, it is expensive to rent an apartment. Mortgages play an integral role in the US. Many people want to own their own place. With higher interest rates, people will have to recalculate their financial ability to afford mortgages.

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  2. Brandon FrankelMarch 26, 2022 at 3:48 PM

    With rising inflation, the housing market has gotten super expensive and that will come with many consequences. The average person will now have to look for homes that are smaller and cheaper which hurts standard of living. To add on, renting a home is going to be ridiculously expensive without the benefit of having an owned asset

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  3. Emily RomstadtMarch 28, 2022 at 1:00 PM

    I agree with what you said at the end of your post about how the increase in mortgage rates could eventually be good for the housing market, but will also lead to more inequality in the market. Since housing prices are increasing so much, but the supply of homes remains low, increasing mortgage rates can help slow down demand for houses, and bring the market back to a more stable place. But, this now means that it will be harder for lower income individuals to afford to buy a home.

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  4. Andrew GalloglyMarch 28, 2022 at 1:14 PM

    This is a scary development considering what happened with this sector in 2008. With the general uncertainty in the Marco economy do you think that such drops could cause a future recession?

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  5. AnonymousMarch 30, 2022 at 4:19 PM

    This is unfortunate to see for all of us, as people our age are near buying/renting our own places. We are also continuing to see issues with raw materials which has caused the supply of houses to decrease. It will definitely be interesting to see how high mortgage rates will rise as interest rates are continuing to rise as well.

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