Housing experts doubt rising mortgage rates will dampen home prices

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The average 30-year fixed-rate mortgage is poised to surpass 5%

Mortgage rates are measured in different ways by different organizations, but one thing seems fairly certain. The average interest rate on a loan to purchase a home is headed toward 5%.

The reason for the rapid rise in mortgage rates, which were well below 4% in late February, can be tied to a rise in the yield on the 10-year Treasury bond. That rate consistently stayed below 1% during the pandemic, keeping mortgage rates at record lows.

This week, the yield on the 10-year bond is roughly 2.5%. Bond yields rise when there are fewer investors who want to buy them. The Treasury Department increases the interest rate to attract more buyers.

So, what’s that mean for the housing market? Home prices are at record highs, but if fewer people can qualify for a mortgage at a higher interest rate, then that means fewer homes will be sold.

It’s not normal

Housing experts say fewer homes tend to sell under these conditions, but nearly everyone we consulted pointed out that these are not normal circumstances because of the shortage of available homes. Michael Gifford, the CEO & co-founder of fintech firm Splitero, says prospective buyers should not expect prices to go down.

“Nominal interest rate increases will deter some buyers, but the demand from lack of inventory over the last few years is still driving home price appreciation,” Gifford told ConsumerAffairs. “We operate in many markets where homes are still selling in hours or days due to high demand.”

Even if 30% of people who want homes are priced out of the market because of rising mortgage rates, that leaves 70% who can still afford to buy and will continue to drive up the prices of available homes.

“Inflation, affordability, interest rates, supply, and other factors will likely need to combine over the course of the year to stop rising prices,” Gifford said.

Jay McCanless, an equity research analyst at Wedbush Securities, says rates have been moving higher for 16 months, with no slowdown in home prices. Sales might decline for a month or two, but that’s often because there aren’t enough homes for sale in a key market.

“We’re hesitant to say a certain rate level or percentage will pause or stop demand," he told us. “We’d also note that the lack of shelter – rental and for sale – is as acute as we’ve ever seen. That acute shortage has and may continue to put stress on all types of for rent and for sale housing."

Bad news for renters

Shmuel Shayowitz, president and chief lending officer at Approved Funding, says these housing conditions are bad news for people who must continue to rent.

“As with most supply-and-demand principles, if more people revert to renting, that will continue to add more pressure to an already rising rental marketplace,” Shayowitz said.

Polina Ryshakov, lead economist at real estate broker Sundae, points out the difference in 3% and 5% mortgage rates translates to about $125,000 more on a $500,000 home. But with record-low inventory, that fact won’t slow sales this spring.

"These higher rates will eventually slow the bidding wars that we’re seeing because it will limit how many people can afford to buy homes,” Ryshakov told ConsumerAffairs.

The National Association of Realtors’ latest existing home sales report illustrates the imbalance now present in the housing market. Home sales sank 7.2% in February, but the median home price rose to $357,000. That means homes were 15% more expensive than they were in February 2021.

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