Rising Mortgage Rates Cool Housing Market

Rising mortgage rates are dropping home values for the first time in 10 years. The Federal Reserve raised benchmark interest rates by three-quarters of a percentage point last month. It was the third time the Fed raised rates by 75 basis points. They intend to continue hiking rates to fight inflation.

Many still wonder how the Fed rate hikes affect the real estate market. When rates are high, it becomes more expensive to borrow money, which lowers buyers’ affordability. 

According to Mortgage News Daily, the mortgage rates are now at 20-year highs. “What’s important is that in less than a year, the payment on a new $400k mortgage is up at least $1000/month.  Many lenders are now quoting top tier 30yr fixed rates over 7%.”, said Matthew Graham, chief of operations.

Low inventory and soaring prices have been a common scene in the housing market over the past few years. This year buyers are faced with a new obstacle. High mortgage rates are a new challenge to them. Buyers are now having to choose between high rates, renting or something even riskier, adjustable-rate mortgages.

Pressured by high mortgage rates, home buyers are facing longer term consequences. Adjustable-rate mortgages offer lower rates for the first few years of the loan. The risk comes after the introductory period is over, when rates can increase by hundreds of dollars a month after the first few years. This could trigger a new housing crisis like we experienced in 2008, when exploitative lending caused millions of borrowers to lose their homes.

Even with higher interest rates, home prices were still higher than a year ago. According to SmartMLS, the median price of an existing home sold in September was $710,000 in Easton, up 17.1% from a year ago. In Fairfield County, the median price was $630,000.

America’s overheated housing market is shifting. “The housing market is showing an immediate impact from the changes in monetary policy,” said Lawrence Yun, chief economist for the National Association of Realtors. “Some markets may be seeing price declines.”

The home sales decline from last year suggests a significant softening in the housing market. Sales fell 22.1% in Fairfield County in September of 2022. Much of that has to do with supply. Inventory also dropped 19.9% in September, compared to last year.

The lower demand will force sellers to cut prices or offer concessions to keep buyers engaged. This will likely cause prices to fall and halt excessive price hikes. “House prices will soon undergo a ‘correction’, but not a crash”, said Mark Zandi, chief economist at Moody’s Analytics on MarketWatch

As of October, annual inflation is at 8.3 percent, approaching a 40-year high. This has led to economists and market watchers debating if Fed Chair Jerome Powell’s plans to cool off the overheated economy could have the unintended consequence of throwing our economy into a recession.

We will continue to monitor these housing market trends and broader economic developments in future updates in the Courier.

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