High mortgage rates may ultimately benefit home buyers

Photo (c) March Meena - Getty Images

Surging rates have slowed sales and are bringing down prices

Rapidly rising mortgage rates, coupled with near-record-high home prices, have priced many buyers out of the housing market. But there are signs in various industry reports that the result of high mortgage rates could improve affordability in the months ahead.

With fewer buyers, the shortage of available homes that plagued buyers over the last two years is finally moving in the other direction. RE/MAX, a national brokerage firm, reports the inventory of homes grew 3.9% in September over August and is up 30.4% year-over-year. The number of homes on the market is growing, even though new listings were down 7.6% last month.

"After a sustained period of quick sales that kept the housing cupboard relatively bare, a supply of two months presents a lot more options for homebuyers," said Nick Bailey, RE/MAX president and CEO. "For a long time, six months of inventory was the standard for a balanced market that favored buyers and sellers evenly. Now, with the evolution of technology and various changes in homebuying patterns, the new standard is becoming four months. We're halfway to that level, and the market is making steady progress toward balance.” 

Competition helps buyers

When there is an ample supply of available homes, sellers face more competition and buyers have more choices. When that happens, home prices usually soften.

A new report from real estate broker Redfin shows that’s already happening. After analyzing nationwide listing prices, the broker says 7.9% of sellers dropped their price during the four-week period ending Oct.9. That’s about double the rate from last year as the market has shifted at a near-record pace.

“Prospective homebuyers and sellers barely had time to get used to 5.5% mortgage rates over the summer before they rose to nearly 7% this month,”  said Redfin Deputy Chief Economist Taylor Marr. “The second sharp rate increase this year, together with nerves about inflation and the direction of the economy,  is dragging home-sale activity down further than it was over the summer and pushing homebuyer sentiment down near its all-time low.”

At long as mortgage rates remain at their present levels there is little benefit for buyers. For many, mortgage payments on the median-priced home are still out of reach. But rates may not remain in that range forever.

The outlook for mortgage rates

Rates could move even higher between now and the end of the year, but some in the industry think buyers could see some relief. The Mortgage Bankers Association (MBA) predicts rates could average around 5.5% by the end of December.

Rising mortgage rates are the indirect result of the Federal Reserve’s aggressive policy to squash inflation – specifically to slow the growth in home prices. That policy has contributed to a sharp rise in the yield on the Treasury’s 10-year bond – which directly influences mortgage rates. When the Fed declares victory and returns to a normal credit policy, mortgage rates could come back down.

With a lower median home price and mortgage rates in the 4% range, affordability conditions could improve to the point that people currently priced out of the housing market could see more choices and affordable monthly payments.

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