Mortgage rates continue their climb, with the weekly average for 30-year fixed-rate loans reaching 6.92% this week. This is the highest rate in the last 20 years, and 3% higher than at the beginning of this year. Rising rates have been slowing down home sales for 7 consecutive months, as buyers are unable to afford the higher payments.
To get an idea of the importance of interest rates, assuming a 10% down payment, a home listed at the national average price – $435,050 in August 2022 – cost nearly $1,000 more per month than in August 2021, when the average interest rate was 2.88% and the average home price was about 14% lower.
As a result, high interest rates are putting homeownership out of reach for millions of people. Consequently, the real estate market today no longer sees bidding wars and multiple offers on a property. It is now common for a real estate agent to hold an open house and have no one show up.
Home sales are at their slowest since 2015. However, even with low demand, home prices have fallen modestly, about 6% from the peak in June of this year.
The biggest factor supporting prices is the scarcity of homes for sale. The supply of houses remains very tight. Those who bought a property with interest rates at 2.5% or 3% are not going to make the crazy decision to sell their home now and have to buy another one at nearly 7% interest. Additionally, for a decade, the pace of new home construction has lagged behind demand, which also contributes to limiting supply.
But surprise! Although the sudden increase in loan costs is shocking for potential buyers, interest rates at 7% are far from being a record for the industry. The rate peaked at over 18% in 1981, according to Freddie Mac, although at that time home prices were much lower relative to the average income of the population.