Another Big Shock to the Housing Market

As US mortgage rates go through the roof, NAR warns they could go much higher.

Housing Market

The chief economist of the National Association of Realtors (NAR) says that if mortgage rates break above the 7% level, they could potentially jump to 8.5%.

According to Bloomberg, the possibility of another 1.5 percentage points jump is based on a technical analysis by NAR’s Lawrence Yun, who studied key levels of resistance that borrowing costs will test after Thursday’s news about inflation hitting a 40-year high.

After inching closer to 6% over the past few months, the average rate for a 30-year fixed mortgage this week printed 6.92% — its highest level in 20 years and up from 3% at the start of the year — when Yun’s findings were presented at the National Association of Real Estate Investors’ Atlanta conference.

“Today’s inflation rate report is going to test that 7 percent level,” Yun said in the presentation. “Once it’s broken, the next level of resistance is 8.5 percent, which would be another big shock to the housing market.”

Analysts define resistance as a barrier that could stop or reverse the price increase of an index, asset or interest rate. To Yun, this concept is comparable to two conflicting armies at a standoff.

“Once one army makes a breakthrough, there’s a huge advance,” he said.

This week, rates surged back to their record-setting levels with the 30-year fixed mortgage hitting an apex not seen since April 2002.

Soaring mortgage rates have caused the sales of homes to decelerate for 7 straight months as buyers who can’t manage the increased payments opt out. In fact, mortgage rates have increased to the point where home ownership is out of reach for millions of Americans. This has had a domino effect on the housing market, cooling it down significantly.

These days, realtors often have open houses with nobody showing up. This is in stark contrast to last year’s housing market conditions where realtors had bidding wars and multiple offers on every home.

“What we’re experiencing now is like a hangover from this party in the housing market that was going on for the last two years,” Daryl Fairweather, Redfin’s chief economist was quoted as saying. “That party was fueled by cheap debt from the Federal Reserve, and now inflation is ending the party.”

The Federal Reserve decided to keep rates low after the pandemic hit in order to avoid a potential recession from business shutdowns. However, these low rates combined with an increased demand sparked home prices to rise anywhere
between 30-40% within two 24-months, depending on the housing index you observe.

To fight inflation, the Fed is aggressively hiking interest rates. Unfortunately, this has also more than doubled mortgage rates this year and put a damper on the housing market.

According to Freddie Mac, the data tells a story of two different economies: although job and wage growth are strong, consumers are still worried about inflation, recession, and housing prices.

The government-sponsored enterprise believes that the next few months will be important for both the economy and the housing market.

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