Housing Market Freezes As Mortgage Rates Reach New Millennium Peaks

The housing market has been grappling with rising mortgage rates and declining homebuilder sentiment over the past couple of years, as mortgage rates hit the highest level since 1995 while homebuilder sentiment fell to a 10-month low earlier this month. 

Tech-based real estate company Zillow Group's chief economist Skylar Olsen recently described the current housing market as frozen after the median 30-year mortgage rates crossed the 8% mark. 

As the housing market has affordability hovers near record low levels, homebuilder sentiment has also been declining. The result means less construction of new homes across the country and added pressure on the supply front, pushing up the price of homes further. 

"Builders have reported lower levels of buyer traffic, as some buyers, particularly younger ones, are priced out of the market because of higher interest rates," said Alicia Huey, Chairman of the National Association of Home Builders (NAHB). "Higher rates are also increasing the cost and availability of builder development and construction loans, which harms supply and contributes to lower housing affordability."

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The Handcuff Effect 

People who bought their houses during the COVID-19 pandemic managed to lock in mortgage rates at or below 3%. Benefitting from the ultra-low mortgage rates, these individuals often feel locked into their current rates and are unwilling to upsize or downsize their current homes because of fear of higher payments. 

"Even if they bought a cheaper house, their payments would go up," Nicole Bachaud, a senior economist at Zillow, said.

While readily surging house prices might incentivize people to sell their homes, sky-high mortgage rates are a major deterrent. 

According to a survey conducted by Realtor.com, approximately 82% of individuals searching for homes felt locked in by their current low-interest mortgage and "don’t necessarily want to give that up in exchange for a rate in the 6-7% range.”

Zillow’s Estimated Sweet Spot

While the housing market activity has seemingly declined with buyers and sellers staying put, Zillow's Olsen estimates that individuals with "mortgage rates at 5% or above are twice as likely to sell their existing homes within the next three years."

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Olsen cited major reasons behind existing home sale deals to be "life fundamental" rather than market-opportunity-based, such as going through divorces, having children or job loss. 

Additionally, a survey by John Burns Research and Consulting revealed that 71% of prospective homebuyers who intend to finance their next home purchase with a mortgage are unwilling to accept a rate exceeding 5.5%, which is referred to as the optimal mortgage rate.

"These existing homeowners either can't or are unwilling to sell their home because they can't afford a mortgage on a new home," Zillow's Bachaud said

Housing Industry's Plea: Stop Raising Interest Rates

On Oct. 9, 2023, the Mortgage Bankers Association, National Association of Realtors (NAR) and NAHB signed a joint letter to the Board of Governors of the Federal Reserve to stop raising interest rates as well as avoid selling mortgage-backed securities holdings until the housing market stabilizes. 

"Housing activity accounts for nearly 16% of GDP, according to NAHB estimates. We urge the Fed to take these simple steps to ensure that this sector does not precipitate the hard landing the Fed has tried so hard to avoid," the letter stated. 

Following a scorching summer where mortgage rates steadily increased, the housing market is experiencing an early winter in October. Existing home sales plummeted by 15% in September compared to the previous year, according to NAR, the lowest level since the Great Financial Crisis triggered by the subprime crisis in the U.S. back in 2008-2010. 

"As has been the case throughout this year, limited inventory and low housing affordability continue to hamper home sales," NAR's chief economist Lawrence Yun said, "The Federal Reserve simply cannot keep raising interest rates in light of softening inflation and weakening job gains." 

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