What Higher Mortgage Rates Mean for the Housing Market

The recent uptick in mortgage interest rates is having a chilling effect on home buyers at the moment, but Wharton real estate professor Benjamin Keys doesn’t expect that to last.

Mortgage interest rates have increased across all categories in the last several weeks, following the Federal Reserve’s first rate hike since 2018 to fight inflation. The interest rate on a 30-year fixed-rate mortgage topped 5% last week, compared with less than 3% a year ago. The jump corresponded with a 40% drop in mortgage applications from a year ago.

“Aside from a few days in 2018, we haven’t seen rates this high persistently since around 2011,” Keys said. “Mortgage rates are the real focus among a lot of people right now, and trying to understand what impact [that is] going to have on housing markets.”

Sky-high rents have been spiraling faster than home prices in the last decade, which will continue to push many Americans toward home ownership. With a fixed-rate mortgage, they can budget a stable monthly housing expense for the next 15 or 30 years.

He said the rate hike immediately incentivizes current homeowners to stay put because they’re “locked in” to the great low rates they got over the last few years. It also “locks out” prospective homebuyers who now have to worry about higher interest rates adding hundreds of dollars a month to mortgage payments on homes that are already priced historically high. The median sale price of a home in the U.S. hit $405,000 in March for the first time ever.

Still, Keys noted, demand for housing is outstripping supply. In addition to rising rents and the scarcity of rental units, other demographics are contributing to the trend: a strong labor market, higher personal savings during the pandemic, and millennials who survived the Great Recession and are now financially ready to buy homes for their growing families.

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