At the start of 2022, many housing economists expected mortgage rates to hit 4% by year end. Last week, they nearly reached 7% — the highest point in 20 years.
The rapid ascent — touched off by the Federal Reserve’s moves to contain inflation — has sidelined homebuyers and persuaded rate-locked homeowners to stay in their current houses rather than trade up.
Where rates end up in the remaining months of 2022 has led many housing economists to revisit their forecasts yet again amid the volatility.
“We are seeing consumer prices continuing to remain elevated and continue growing. I don’t see the Fed being successful this year in putting a dent in inflation come December,” George Ratiu, senior economist and manager of economic research at Realtor.com, told Yahoo Money. “That tells me that we are potentially looking at a 7.50% as the next threshold. What happens beyond that remains in the hands of the Fed.”
Ratiu and Realtor.com earlier forecasted rates to reach about 5.50% by year end. Similarly in July, Freddie Mac revised its earlier predictions and said the 30-year fixed rate mortgage would average 5% in 2022 and 5.1% in 2023.
Last week, the average rate on the 30-year fixed mortgage hit 6.92%, according to Freddie Mac.
“Every economist basically missed the mark in terms of how high mortgage interest rates would be,” Taylor Marr, deputy chief economist at Redfin, told Yahoo Money. “I tried a lot of industry forecasts from various studies — the MBA, NAR, Zillow, Goldman — pretty much everyone undershot in terms of their expectations for where more recent rates would go this year.”
With inflation running at 40-year highs, the Federal Reserve has taken a hawkish stance on tightening its monetary policy, increasing its short-term benchmark interest rate by three-quarters of a point in September, the third such hike this year. It also signaled hiking more at its two remaining meetings scheduled this year.
The effects have rippled through the housing market. In the last 11 weeks, mortgage rates have climbed nearly 2 percentage points, tracking the jump on the 10-year Treasury yield. The rapid growth is mostly due to investors moving in anticipation of Fed hikes.
“The pace of increases was absolutely bonkers,” Marr said. “Interest rates really rose at a faster pace than any point in history, relative to their previous low. We had mortgage interest rates more than double and so it was really just unprecedented. If we were to simply model what's the likelihood that mortgage interest rates would double over the next year? We would have assigned that about a 1% probability.”
In another attempt to tame inflation, the central bank is reducing the size of its $8.8 trillion balance sheet by significantly scaling back the mortgage-backed securities it holds. In June, July, and August, the Fed allowed up to $17.5 billion of mortgage-backed securities to expire per month without renewal. As of September 1, at least $35 billion of these securities matured.
“The Fed’s purchase of mortgage-backed securities was an important way that the Fed participated in housing finance,” Ratiu said. “During the bulk of the pandemic, to ensure there was adequate liquidity, this initiative in essence drove rates to the historic lows we saw last year.”
On the flip side, though, it’s harder to predict where rates will end up, especially as volatility has remained quite high.
“As long as inflation doesn't continue to climb at a more aggressive pace, and the Fed doesn't continue to shift up their expectations, then I would expect that rates will kind of remain flat,” Marr said. “Right now, they're just under 7%. By the end of the year, it's maybe 6.50%, maybe they come down slightly, but at this point the climb has been unprecedented. They could just as easily climb higher or they could even fall pretty fast. Mortgage rates are at their most volatile time in more than 35 years. Which means that they can swing very rapidly up or down.”
Rate spikes spook both buyers and sellers
What’s not hard to see is the severe consequences rising rates have had on the housing market, especially among entry-level homebuyers.
“People need to earn $40,000 more in order to afford to buy the median-priced home compared to a year earlier,” Nadia Evangelou, senior economist and director of forecasting at the National Association of Realtors, said in a news statement.
While the median home price has softened to $427,000, it remains too high for many buyers. At 6.92% with a 20% down payment, the monthly mortgage payment is $2,254, according to Realtor.com, or 75% more from the same week last year, adding $11,600 to the annual cost of financing a home.
Many first-time homebuyers are sitting it out instead, and now move-up buyers are choosing to stick to their current 3% rate and put off their purchase plans.
“For repeat homebuyers, not only are they generally looking at a more expensive home, but they are looking at a mortgage rate that is, at least in some cases, double what they have right now,” Ratiu said. “So the impact on families, on a budget is significant.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.