The U.S. economy has been doing pretty well, but the housing market is struggling. Why? Well, mortgage rates (the interest you pay on your home loan) are around 8%, and house prices have gone up a lot during the pandemic. This makes houses less affordable and slows down the housing market. If mortgage rates stay high, it could lead to a housing recession and lower prices down the road for potential buyers.
In the first half of 2023, the housing market was improving. But now, it seems to be shrinking because of the increase in mortgage rates. For the first time in over 20 years, the 30-year fixed mortgage rate (a type of home loan) reached 8% in early October. Even if these rates go down as the Federal Reserve eases its fight against inflation (rising prices), they’ll still be high compared to what they were during the pandemic.
This is very similar to the situation in the 1980s. Back then, there was high inflation, high interest rates, and a new generation of homebuyers—much like today.
If interest rates stay high for a long time, it could affect both demand (people wanting to buy houses) and supply (houses available for sale). This is because high rates could discourage new construction and make people with low mortgage rates hesitant to sell their homes.
According to the National Association of Realtors, the average monthly payment for a 30-year fixed rate mortgage was 26% higher in August than it was a year ago. This increase is much higher than the growth in median family income (the middle point of all family incomes), which only went up by 5%.
But it’s not just high borrowing costs that are making houses less affordable. Home prices have also gone up by over 40% since the pandemic started. Plus, there’s less supply because homeowners are holding onto their homes, fearing they’ll lose their low mortgage rates in a market that’s already short on houses.
In short it could be to your advantage to wait for mortgage rates to drop before taking the plunge, locking in a 30 year fixed rate at 8% might not turn out to be the best choice, at least not right now.
