7% Mortgage Rates Are Almost Here. What That Means for Home Sellers.

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For Hazel Shakur, a

Redfin

real estate agent working in the suburbs of Washington, D.C., the end of summer normally means a pickup in consultation requests from prospective sellers looking to list before traffic slows down in the winter.

But not this year. “I polled other listing agents in my area, and sure enough, we went into this weekend with no appointments,” Shakur said. “A lot of sellers are very reluctant about selling their house.”

Buyers, too, are pulling the break as home prices soften. “No one wants to be the person who buys the house for too much,” Shakur said. 

Such reluctance comes amid a broader housing market slowdown as rising mortgage rates cut into home affordability and keep some would-be sellers from moving. Further rises could be on the way. Depending on the trajectory of inflation and the Federal Reserve’s response through monetary policy, an ascent to 7% isn’t out of the question. 

Mortgage rates have been in the spotlight lately, and for good reason. The average rate on a 30-year fixed mortgage has more than doubled this year, rocketing higher in the wake of August’s hotter-than-expected inflation report and in anticipation of the Federal Reserve’s September FOMC meeting. Last week’s average rate on a 30-year fixed mortgage was 6.29%,

Freddie Mac

said—the highest such rate since 2008. 

The average weekly rate still has a way to go before it hits 7%, but such a rise isn’t off the table. Whether or not mortgage rates hit 7% comes down to the Federal Reserve’s fight against inflation, says Keith Gumbinger, vice president of mortgage website HSH. 

Should inflation soften, “we’ll have a chance to stay away from 7%,” Gumbinger says. “If the inflation news in the next couple of weeks isn’t good, or the economy continues to show more growth than the Fed wants to see, or if we have a blowout jobs report, there is a chance we could push more closely toward 7% ,” Gumbinger said.

Mortgage rates’ rise has added significantly to the cost of financing a home purchase: compared with the final week in 2021, the buyer of a $400,000 home at last week’s rate would owe roughly $600 more a month on their home loan. 

If would-be home buyers were searching for a sign that mortgage rates were about to come down, they didn’t get it in Federal Reserve Chair Jerome Powell’s press conference following the Fed’s decision to raise interest rates by 0.75 percentage point. The central bank signaled that its terminal rate could peak higher than previously expected. 

Powell commented on the mortgage rate-driven slowdown in the housing market. “This difficult correction should put the housing market back into better balance,” Powell said during a press conference last week. 

The Federal Reserve’s more aggressive tone amid still-hot inflation is behind mortgage rates’ most recent run-up, says John Toohig, head of whole loan trading at Raymond James. Those same factors will likely drive mortgage rates’ movements in the near-term. Softer inflation readings could bring mortgage rates down, Toohig says, “but if those inflationary numbers remain hot, like the one we just went through, I would expect mortgage rates to continue up.”

So, what would it mean if mortgage rates were to hit 7%? For buyers, rising rates are a double-whammy to both affordability and, likely, home supply. At 7%, financing the purchase of a $400,000 home would cost about $760 more a month than it did at the end of 2021, and about $150 more than at last week’s rate. 

There are also signs that sellers—many of whom would become buyers themselves—have pulled back. The volume of new listings measured by Redfin during the four weeks ending Sept. 18 was about 20% lower than the same time last year, the metric’s greatest year-over-year drop since the early pandemic’s housing market freeze. 

Current homeowners who bought or refinanced their loans at 2020 and 2021’s low rates have little incentive to list their homes now that mortgage rates have doubled—a concept known as the mortgage rate lock-in effect. Put simply, some homeowners “are unwilling to move because they just love their low interest rates,” National Association of Realtors chief economist Lawrence Yun said during a press conference earlier this month.

Considering rates’ steep drop during the pandemic—the average 30-year fixed mortgage rate was just under 3% in 2021, according to Freddie Mac data—the lock-in effect could keep a whole lot of homeowners in place. A recent Redfin analysis found that 85% of all homeowners with mortgages had rates lower than 5%, disincentivizing a move at current rates. An increase in mortgage rates to 7% or above would further shrink the pool of homeowners with a financial incentive to move. 

A rise in rates would continue to weigh on home sales. In a press conference last week, National Association of Realtors chief economist Lawrence Yun said that existing-home sales, which have fallen for seven straight months, could stabilize if mortgage rates did as well. But, should they keep climbing? “All bets are off,” Yun said.