Rising mortgage rates could lead potential home buyers to shun the market, avoiding exorbitant interest payments.
As a result, homeowners interested in selling are rushing to dump their domiciles before possible buyers run away, The Wall Street Journal reports.
The Federal Reserve in March began its campaign to raise interest rates, with a 0.25-percentage-point move. And many economists and investors expect a half-point hike in May.
Meanwhile, bond yields continue to rise, with the 10-year Treasury yield climbing 0.38 percentage point in just the past two weeks to 2.62%.
The combination of Fed tightening and rising bond yields has pushed mortgage rates higher. The average 30-year fixed-rate mortgage soared to a three-year high of 4.67% in the week ended March 31, according to housing agency Freddie Mac. That’s up from 4.42% a week earlier and 3.18% a year earlier.
The Schroeders Look to SellSo it’s no wonder that homeowners are rushing to sell. “The thought of rising interest rates has lit a bit of fire to our timeline,” Meri Schroeder, a retiree in Frederick, Md., told The Journal. She and her husband expect to begin marketing their 3,400-square-foot home in the next several weeks.
People like the Schroeders may have good reason to worry.
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“As rates quickly approach 5%, we expect their impact on homebuyer demand to change from a motivator — driving a sense of urgency to buy before rates rise further — to a deterrent, causing buyers to step back as the cost of homebuying exceeds their budgets,” Redfin economists wrote in a commentary. “There are a number of early signs that this shift is beginning to take place.”
Signs of imbalance in the housing market abound, with demand outstripping supply, pushing prices higher. The S&P CoreLogic Case-Shiller home-price index soared 19.2% in the 12 months through January. That’s the fourth largest reading in the index’s 35-year history.
Rapid Macro Evolution“The macroeconomic environment is evolving rapidly,” Craig Lazzara, managing director at S&P DJI, said in a statement.
“Declining Covid cases and a resumption of general economic activity has stoked inflation, and the Federal Reserve has begun to increase interest rates in response. We may soon begin to see the impact of increasing mortgage rates on home prices.”
Presumably that rate increase would force prices down, as buyers balk at rising interest rate payments on their mortgages. But this may not happen quickly.
“It will take a sharper drop in sales to bring the market back into balance and allow prices to increase at a more modest pace,” David Berson, chief economist at Nationwide, told Reuters.
Higher mortgage rates damping the housing market may be a good thing.
“The housing market has gone into a savagely unhealthy stage,” Logan Mohtashami, lead analyst at HousingWire, told Fortune. “Everyone should embrace higher rates to cool off this madness and hope inventory rises. Let higher rates do their thing.”