With Mortgage Rates Increasing, Economists Are Lowering Their Home Sales Forecasts

Rates on the Rise

Mortgage rates have been climbing for weeks, due in part to the Fed’s recent rate hike. The trend has accelerated recently. From Friday of last week to this Tuesday, the average rate on a 30-year fixed mortgage jumped 26 basis points to 4.72%. Last year at this time the average was closer to 3.45%.

Although there is upward pressure on mortgage rates, the housing market is still red hot. Supply is historically low, and demand is strong, meaning there is intense competition for homes that are on the market. CoreLogic reports prices have surged upwards in response, growing 19% year-over-year as of this January.

Shifting Forecast

The speed at which mortgage rates are rising is what’s catching some analysts off guard. Many estimates predicted the average 30-year mortgage rate wouldn’t hit 4.5% until the end of 2022. Clearly that mark’s been topped with over eight months to go.

Economists are now adjusting their expectations for home sales in response. In order to try and predict future interest rates, traders will look at the 10-year US Treasury yield, which partially influences the 30-year fixed mortgage. Yields are at their highest level since 2019, suggesting mortgage rates will continue on an upward trek. Where market observers had predicted home sales to fall by around 3% this year, some are now expecting a decline of closer to 6% or 8%.

Housing Market Impact

The impact on homebuyers is immediate when it comes to rising mortgage rates. Higher interest payments means financing homes becomes more expensive. This makes purchases less affordable. First-time homebuyers are at a particular disadvantage, given they’re not benefiting from the sale of a property ahead of any purchase.

Still, if there’s any light at the end of the tunnel for buyers, it may come in the form of falling prices. Realtor.com reports asking prices fell slightly last week. Economists say sellers may be starting to realize that rising mortgage rates are going to tighten buyers’ budgets. 

By Meg Richardson