Could 7% Mortgage Rates Finally Sink Home Prices?

Mortgage rates surging to 21-year highs are putting more stress on the housing market, and could send the recent rebound in home prices into reverse.

The average rate offered for a 30-year fixed mortgage rose to 7.09% on Thursday, its highest since 2002, according to Freddie Mac. That could put more strain on homebuyers already struggling to afford to buy, and may put downward pressure on prices.1

“The latest rise in rates is likely to throw a deep chill into housing markets,” Douglas Porter, chief economist at BMO Capital Markets, said in a commentary.

Home prices hit new record highs this summer as buyers competed for an unusually low number of homes for sale. Home prices fell in the second half of 2022, but have gained that ground back this year amid moderate price increases. Mortgage rates at multi-decade highs could upset that balance.2

The housing market could be vulnerable to a downward price correction, Matthew Walsh, an economist at Moody’s Analytics, wrote in an analysis Thursday. He said the recent rebound in prices is “a bit surprising” given the high mortgage rates, and expects them to start falling again soon.

“While tight supply has pushed prices higher, it would be premature to celebrate the end of the housing correction,” he wrote. “Temporary shifts in price are typical as demand and supply adjust into a new equilibrium. Further, the national housing market remains highly unbalanced and unaffordable despite the significant moderation in annual house price appreciation.”

Houses nationwide in the second quarter were on average overpriced by 16%, according to Walsh’s analysis. That is, prices were above what typical wages and salaries should support.

How the Market Became Deadlocked

Up to this point, high mortgage rates since mid-2022 have kept both buyers and sellers out of the market.

For many buyers—especially those looking for their first home—the problem is affordability. As of May, a typical monthly payment for a mortgage on a newly-purchased home was $2,268, according to mortgage data company HSH, up from $1,426.21 before the pandemic hit, assuming a 20% down payment and a 30-year fixed-rate mortgage. That means a buyer would need a salary of $97,204 to afford to buy a house as of May, compared with $61,123 before the pandemic.3

Before the pandemic, the typical household had enough income to buy a house, and that’s no longer the case. The median household had $70,784 in income in 2021, far short of the amount needed to afford a house, according to the most recent data available from the Census Bureau. By contrast, the median household income in 2019 of $68,703 was sufficient to make monthly mortgage payments on a typical home, according to HSH’s calculations.

Buyers face a double whammy of higher prices and ballooning mortgage rates, both of which have contributed to the decline in affordability. Home prices were 43% higher as of May than at the start of the pandemic, according to the S&P CoreLogic Case-Shiller Home Price Index. The average rate offered for a 30-year fixed-rate mortgage of 7.09% this week is more than double the 3.45% buyers were getting before the pandemic, and well above the record low 2.65% offered in 2021, going by data from Freddie Mac.

The surge in mortgage rates alone has added hundreds of dollars to typical monthly payments. To buy a median-priced home—worth $410,200 as of June, data from the National Association of Realtors shows—a buyer would pay $738 more per month than they would have to buy the same-priced house in February 2020 because of higher mortgage rates alone.4

Higher mortgage rates have also impacted sellers because most homeowners with mortgages are reluctant to give up their low fixed rates. Fewer listings means there’s still plenty of competition for those still on the market despite more buyers sitting on the sidelines.

Mortgage rates have risen as a consequence of the Federal Reserve’s campaign of anti-inflation rate hikes since March 2022. The central bank has raised its benchmark interest rate to its highest since 2001, putting upward pressure on rates for mortgages and other kinds of loans. Rates jumped again this week after a spate of data showed the economy is staying hot despite the Fed’s efforts to cool it down, stoking traders’ fears that rates could stay higher for longer.

1. Freddie Mac. “The 30-Year Fixed-Rate Mortgage Reaches its Highest Level in Over Twenty Years.”
2. S&P Dow Jones Indices via Federal Reserve Economic Data. “S&P/Case-Shiller U.S. National Home Price Index.”
3. HSH. “The salary you must earn to buy a home in the 50 largest metros.”
4. National Association of Realtors. “Existing Home Sales.”
5. https://www.investopedia.com/could-high-mortgage-rates-finally-sink-home-prices-7692982