Home Price Growth Slows With Mortgage Rates Above 7%

Mortgage rates rose again this past week, further escalating above 7% for the 30-year fixed term. Interest rates rose across all types of home loans, including FHA loans, VA loans and adjustable-rate mortgages. Here are the current average mortgage rates, without discount points unless otherwise noted, as of Nov. 10:

“The housing market is the most interest-rate-sensitive segment of the economy, and the impact rates have on homebuyers continues to evolve. Home sales have declined significantly and, as we approach year-end, they are not expected to improve.”

– Sam Khater, Freddie Mac’s chief economist, in a Nov. 10 statement

We’ve mentioned before that mortgage rates will likely stay high while the Federal Reserve battles to get inflation under control through a series of aggressive benchmark rate hikes. In this month’s newly released inflation report, consumer prices rose at a 7.7% annual pace in October, according to the Bureau of Labor Statistics. And although this is still far above the Fed’s 2% annual target, it represents a slowing pace of inflation over the past several months.

Dallas Fed President Lorie Logan, speaking at a Nov. 10 conference, says that this month’s consumer price index report was a “welcome relief, but there is still a long way to go.” She points to the cooling housing market as a sign that the Fed’s rate hikes are working as intended.

“These tighter financial conditions are beginning to bring demand back into balance with supply, particularly in interest-rate-sensitive sectors such as housing,” Logan says.

Another major driver of inflation this past month was the rising cost of rental housing. Rents rose 7.5% annually in October – that’s the largest year-over-year increase since 1982. So while homebuying conditions are still unfavorable at today’s high rates, housing affordability challenges persist for renters, too.

Newly released data from the National Association of Realtors shows that home price appreciation is displaying signs of slowing after two years of running at a red-hot pace. The median sales prices for existing single-family homes was $398,500 in the third quarter of 2022, which is up 8.6% from the same period last year but down from $413,500 in the previous quarter, according to a Nov. 10 NAR report.

While a near-9% annual increase in home sales prices is still far from a sustainable level, signs are pointing to further deceleration in the market in response to slowing demand and higher mortgage rates. Home price appreciation peaked at 22.9% in the second quarter of 2021. Price appreciation remained relatively high in the year after that, but the rate of growth has been trending lower for the past two quarters.

The combination of stubbornly high home prices and 7% mortgage rates has pushed housing affordability beyond reach for many prospective buyers. The monthly payment on a typical existing single-family home with a 20% down payment is up 50% year over year, NAR estimates. Plus, the household income needed to buy a home has increased by about $40,000 since 2019, before the COVID-19 pandemic.

“Much lower buying capacity has slowed home price growth, and the trend will continue until mortgage rates stop rising,” Lawrence Yun, NAR’s chief economist, says of the report.

Still, it would take a significant drop in home values to offset the impact of higher mortgage interest rates, which are the highest they’ve been in 20 years.