What do these decade-high rates mean for homebuyers and sellers?

As mortgage rates rise and housing prices increase, the real estate market is becoming increasingly difficult and costly for prospective homebuyers. Home prices are not rising nearly as quickly as they used to, but if they and interest rates keep rising, the demand for homes will weaken, since more buyers are priced out of the market. This is forcing many buyers to delay the homeownership dream because they cannot afford the punishing combination of higher rates and higher house prices.

While there are expected more homes on the market this spring, higher mortgage rates could be keeping some sellers from moving as they are reluctant to take on more interest payments on a home loan, coupled with higher prices on the next home. Rising rates are creating a big lock-in disincentive for prospective sellers of new homes. The market for selling a new home is most problematic at higher rates, particularly given all of the completion backlogs. Higher rates should send both the sellers of homes and home builders into overdrive, as their price power is too great.

Other housing experts think rates are not likely to rise this high this year, but they are definitely not impossible. Mortgage brokers think rates will hit 6 percent this year. Mortgage experts expect rates to keep rising after reaching an all-time low earlier this year.

Those looking to refinance should be able to find some nice deals the rest of this year, although rates will need to stay slightly higher than they are currently. In the short run, a lot of homeowners who refinanced and got lower monthly mortgage payments, while interest rates were at record lows, will be reluctant to sell their homes only to have to buy them back again at higher rates. Record-low rates over the past two years pushed a lot of people into buying homes, and a lot of owners refinanced to get a lower monthly payment. Homebuyers have shown resilience even as rising mortgage rates have driven up monthly payments about a third from a year ago.

Someone buying a house today is likely paying roughly 47% more for the same home than they did one year ago, after accounting for higher prices and rates. Mortgage holders buying homes in New Jersey are paying on average $325 more per month compared to buying that same house in January, according to LendingTree.

As mortgage rates slowly make their expected move into the 3.5% range before year-end, waning purchasing power could alleviate some pressure on housing prices, with marginal buyers driven from the market, but the competition among those still in a position to afford to buy will remain fierce. Whether mortgage rates stay in the 5 percent range or climb further, the benefit to buyers is that competition for homes is likely to be lower, with fewer bidding wars and lower offers. The increase means mortgage rates, which are separate from Fed rates but generally follow a similar trajectory, are likely to climb further.

The positive yet tenuous link does not capture the way home price appreciation changes as interest rates increase rapidly. The Fed has historically raised interest rates when inflation or growth is higher than desired, and thus higher inflation, stronger economic growth, lower unemployment, and stronger wage growth are associated with higher house prices. Our review of historical data suggests that a spike in mortgage rates typically causes a slower pace of house price appreciation, which can be detrimental to the activity of the real estate market.

By our estimate, roughly 85% of borrowers with outstanding mortgage loans are rated at least 100 basis points lower than their Freddie Mac Market Survey rate in the recent period. The Mortgage Bankers Association, for example, projects that average rates on a 30-year mortgage will hit 3.5 percent by mid-2022, and 4 percent by late 2022. Higher rates could add hundreds of dollars more monthly to the mortgage payments, while the cost of 30-year fixed-rate conventional loans could be in the tens of thousands. Call Liberty Lending today and lock in your home loan!