Rising rates fail to cool housing prices as reluctant sellers keep supply low

A jump in mortgage rates to near the highest levels in decades has yet to cool the hot US housing market, as higher financing costs are keeping many would-be sellers on the sidelines.

The 30-year fixed-rate mortgage average in the US reached 6.96% on Aug. 10, up more than 430 basis points from the average in January 2021, according to Freddie Mac. The rate was at about 7.09% on Aug. 15, according to NerdWallet.

Economists and real estate investors blame much of the imbalance on homeowners locked into historically low mortgage rates and now reluctant to sell for a new, similarly priced home financed at a rate that could cost them thousands of dollars more per month. According to a Redfin analysis of Federal Housing Finance Agency data, 62% of US homeowners have a mortgage rate below 4% and roughly 92% have rates below 6%, meaning that nearly all homeowners are locked into rates below current levels.

"It's a little like people have these golden handcuffs," said Brad Smotherman, CEO of Fair Offer Cash Now Inc., a Nashville, Tenn.-based investment firm. "They don't want to leave their 3.5% loan to go get a 7.5% loan and I don't blame them. But that's keeping inventory off the market."

The impact has begun to ripple through the economy, as elevated housing prices have continued to weigh on persistently high inflation. Faced with limited inventory and rising rates, first-time homebuyers have been priced out of the market, pushing rental prices higher.

'Staying in place'

The jump in mortgage rates, spurred by the Federal Reserve's efforts to chill inflation with 11 rate hikes since March 2022 and the ongoing rise in Treasury yields, has significantly increased costs for potential homebuyers.

For example, if a potential buyer of a $1 million house put down 20% and got a home loan at current rates, they would pay about $2,150 more per month for the same-priced house than someone who locked in rates in January 2021, according to Bankrate's mortgage calculator. That would translate to about $774,000 more paid over the 30-year life of the loan.

"Moving now would increase mortgage payments by thousands of dollars per month," said Daryl Fairweather, chief economist of Redfin. "We've seen a lot of people staying in place, which has reduced supply. At the same time, that demand has gone down so that has helped keep prices resilient."

Mortgage applications have fallen about 80% since peaking in January 2021, according to the Mortgage Bankers Association.

Kira Mason, a Philadelphia-based real estate agent with Compass, said some potential buyers have put off their plans to buy a home, anticipating that mortgage rates could go down. But some of her clients are looking to buy now, believing that when rates do go down, prices will go up.

"So they are buying now and planning on refinancing later," Mason said.

Supply, demand challenges

Still, housing supply is a struggle, Mason said, and some clients are only seeing one or two homes listed per month that meet their criteria. Even those eager to buy a home are unable to find one in their desired market.

"Certainly the 'locked in effect' is real, and is keeping homeowners in place," Mason said. "I sense that there's a lot of inherent demand that will be unleashed when rates go down."

There were nearly 647,000 active single-family home, condominium or townhouse listings in the US in July, according to the latest Realtor.com data. That was a fall from the recent peak of nearly 750,000 in November 2022, while listings exceeded 1 million at the end of 2019 before the COVID-19 pandemic disrupted the market.

Demand is also sinking. Existing home sales have fallen to 4.16 million in June from an annual rate of 6.56 million in January 2021. Meanwhile, median home sales prices shot up to $410,200 from $307,300 over that stretch, a more than 33% increase in just 2.5 years, according to the National Association of Realtors.

In addition, housing construction, which has grown relatively steadily since early in the pandemic, slowed as the Fed began raising benchmark interest rates.

Path of rates

As the Fed mulls another rate hike this fall, higher rates have clearly hit demand but not yet prices. Still, mortgage rates are likely nearing their peak, said Michael Pearce, lead US economist with Oxford Economics.

Whether the Fed hikes again may ultimately mean little for the future path of home loan rates, Pearce said.

"A far bigger driver will be whether the Fed keeps rates elevated for longer than the markets currently anticipate, which could push longer-term Treasury yields up," Pearce said. "That is only plausible if the economy remains strong, and we begin to see evidence that inflation is reaccelerating, perhaps helped by higher oil and gasoline prices."

Inflation has fallen from its 2022 peak, with the consumer price index rising just 3.2% year over year in July. Yet shelter costs, particularly rent, accounted for nearly all of the price gains in July, according to the Bureau of Labor Statistics. Shelter rent prices rose 7.7% in July from the same month a year ago, just half a percentage point lower than the peak in March.

It is unclear exactly where mortgage rates are headed and whether they have peaked, Fairweather with Redfin said. It is highly likely, however, that rates will not be returning to levels below 4% anytime soon.

"The only thing that could push mortgage rates down that far again would be a major recession," Fairweather said. "It's unlikely, but not out of the realm of possibilities."