Mortgage rates cooled off a bit this week, dropping to an average of 5.7% for a 30-year fixed-rate mortgage. For prospective buyers waiting for these higher rates to bring down home prices, the wait may be long indeed.
“The rapid rise in mortgage rates has finally paused, largely due to the countervailing forces of high inflation and the increasing possibility of an economic recession,” said Sam Khater, Freddie Mac’s chief economist. “This pause in rate activity should help the housing market rebalance from the breakneck growth of a seller’s market to a more normal pace of home price appreciation.”
But so far, that hasn’t happened. In its latest report on home sales, the National Association of Realtors (NAR) put the median home sale price in May at a record $407,000. With a mortgage rate near 6%, the monthly payment has priced millions of people out of the housing market.
Still plenty of buyers
But because there are so few homes available for purchase, along with plenty of people who can afford those higher home payments, sales have not plunged. Kate Wood, housing expert at NerdWallet, says the housing market is probably not in a “bubble.”
"While inflation pushing up the cost of raw materials is more bad news for new construction, we've actually seen prices for existing homes — which had been experiencing sharp year-over-year increases — begin to cool down,” Wood told ConsumerAffairs. “Yes, it's from a raging boil to a strong simmer, but with interest rates eating into home buyers' budgets, any shift toward normalization in the housing market is good news for buyers.”
Yet the higher monthly costs to purchase a home have not dampened demand. NAR reported this week that pending home sales – contracts signed but not yet closed – actually increased in June, rising 0.7%.
A market in transition
Compared with May 2021, however, pending sales were down 13%. NAR Chief Economist Lawrence Yun says that suggests the housing market is in transition.
"Contract signings are down sizably from a year ago because of much higher mortgage rates," Yun said.
Because home prices and mortgage rates are rising together, Yun said it is more difficult to make a 20% down payment. With 10% down on the median-priced home, Yun says the average house payment has increased by $800 a month since the beginning of the year.
Wood says that the higher monthly payments have yet to deter buyers, and home prices don’t appear ready to fall anytime soon. Of course, she says that could be good news for people who already own homes.