The Federal Reserve has been steadily raising its benchmark interest rate in an effort to combat rampant inflation, resulting in mortgage rates that are now so high that aspiring homebuyers are being left out. According to Capital Economics calculations, the average homebuyer who purchases a property at the average price will now spend more than a quarter of their annual income on mortgage payments alone. The rate hikes have not only increased the costs of auto loans, credit card debt, and mortgages, but they have also caused a drop in the volume of mortgage applications, which reached a 22-year low earlier this month. Additionally, housing affordability has decreased by 29% over the past year, representing the steepest annual decline in history.
The Federal Reserve has been purchasing large quantities of Treasury bonds and mortgage bonds to help stabilize the economy. However, some experts argue that house prices will come under pressure if mortgage rates rise above 6%. Most borrowers are protected by a fixed-rate mortgage, home equity levels are high, credit conditions have been tight in recent years, and the possibility of a large increase in unemployment is slim. Despite this, many research firms anticipate a sharp slowdown in home price growth due to the delayed effects of higher mortgage rates and the slowdown in the economy weighing on purchase demand.
The contract's average interest rate for a 30-year fixed-rate mortgage saw its highest weekly increase since 1987 last week. This is due to the Federal Reserve's battle against inflation, which has led to aggressive increases in debt rates and reduced affordability for buyers. The housing market is starting to take a turn as higher mortgage rates devalue or discourage prospective homebuyers. Lien Kiefer, economist at Freddie Mac, told Insider that predicting rate activity is a difficult task as it depends on the economic health of financial markets. Now that mortgage rates have risen to the 6% threshold, global research firms are predicting a slowdown in home price growth.