Home Buyers Have Come to Terms With Higher Mortgage Rates

After more than a year of rapid increases in mortgage rates, housing economists say relief is in sight—but it might not come as quickly as prospective buyers hope. Mortgage rates could move higher in the coming weeks, says Robert Dietz, the chief economist for the National Association of Home Builders, as long-term bond investors anticipate stronger economic growth or further hikes. Despite the possibility of near-term pressure, Dietz says rates are unlikely to surpass their 2022 peak of 7.08%. 

There’s some hope for a significant fall in mortgage rates—though the circumstances needed to bring such a drop are less than ideal for the average buyer. Mike Fratantoni, the Mortgage Bankers Association’s chief economist, says he still expects the U.S. to enter a recession in the second half of the year—a development that would ultimately result in the Fed holding interest rates steady. A softer economy, meanwhile, would bring down mortgage rates. The trade group’s May forecast calls for mortgage rates ending the year at 5.6%.

Consumers have been riding the mortgage rate roller coaster since shortly after the pandemic began. For buyers and sellers trying to anticipate the next curve there are some near-term negatives—but the longer term outlook remains brighter. 

Lawrence Yun, the chief economist for the National Association of Realtors, says rates could once again surpass 7% before the end of the year, depending on the Federal Reserve’s actions. “I was hoping that maybe it could trend down toward 6% by the year end, but now it looks more difficult to reach that low level,” said Yun, whose forecast in May had called for a cut to the fed-funds rate by the end of the year. 

Mortgage rates above 6% aren’t unusual historically, but the circumstances in play earlier in the pandemic create a challenging environment for buyers and homeowners considering selling. Rising rates have taken much of the air out of home price increases, but prices this March remained about 37% higher than they were three years prior, according to the S&P CoreLogic Case-Shiller national home price index, putting pressure on buyers’ budgets. 

Homeowners with low rates are opting not to move, leading to a shortage of new listings and lending strength to home prices. Roughly 92% of all homeowners with a mortgage have a rate below 6%, according to a recent Redfin analysis.

The short-term outlook is likely little balm for prospective buyers. Yun, the National Association of Realtors economist, says his baseline forecast calls for a roughly 10% reduction in home sales this year, following last year’s roughly 18% drop. “But naturally, if the mortgage rate remains elevated, that means that it’s going to be an even larger decline in sales,” he says. 

But there’s reason for optimism. Dietz expects mortgage rates over the next several years to fall to between 5% and 6%—a range he says could loosen the housing market.

“Getting mortgage rates down below 6% does appear to be the sweet spot, or the new normal, for home buyer expectations,” Dietz says. “It doesn’t price in all the demand that was priced out of the market in 2022, but it does price in a significant amount of it.”

Write to Shaina Mishkin at [email protected]