Higher Mortgage Rates Haven’t Slowed Home Price Growth — Yet

Mortgage rates have fallen by half a point since peaking in late June, according to Freddie Mac. Still, the average 30-year fixed rate remains 2 1/2 points higher than it was at the same time last year, which continues to pour cold water on the once-sizzling housing market. Here are the current fixed and adjustable mortgage rates, as of July 28:

30-year fixed: 5.3% with 0.8 point (down from 5.54% a week ago, up from 2.8% a year ago).

15-year fixed: 4.58% with 0.8 point (down from 4.75% a week ago, up from 2.1% a year ago).

5/1-year adjustable: 4.29% with 0.3 point (down from 4.31% a week ago, up from 2.45% a year ago).

[Read: Best Mortgage Lenders.]

“Purchase demand continues to tumble as the cumulative impact of higher rates, elevated home prices, increased recession risk and declining consumer confidence take a toll on homebuyers. It’s clear that over the past two years, the combination of the pandemic, record low mortgage rates, and the opportunity to work remotely spurred greater demand. Now, as the market adjusts to a higher rate environment, we are seeing a period of deflated sales activity until the market normalizes.”

— Sam Khater, Freddie Mac’s chief economist, in a July 29 statement

Higher mortgage rates and uncertain economic conditions have resulted in a meaningful slowdown in homebuying demand. According to the National Association of Realtors, pending home sales fell 8.6% between May and June. On a year-over-year basis, sales were 20% lower last month than they were in June 2021.

“Contract signings to buy a home will keep tumbling down as long as mortgage rates keep climbing, as has happened this year to date,” Lawrence Yun, NAR’s chief economist, says in a news release. “There are indications that mortgage rates may be topping or very close to a cyclical high in July. If so, pending contracts should also begin to stabilize.”

Even if mortgage rates have peaked at their current level, NAR researchers project that pending home sales will be down by 13% in 2022. There’s just less incentive for consumers to buy a home when interest rates are past 5%, compared with the sub-3% rates seen last year.

[Read: How to Get a Mortgage With No Down Payment. ]

Indicator of the Week: Why Aren’t Home Prices Falling?

Sluggish home sales suggest that homebuying demand is finally diminishing after months of consecutive mortgage rate hikes. And although this has resulted in a moderate slowdown in the market, housing prices haven’t fallen — they’re just rising more slowly than before.

The Federal Housing Finance Agency’s House Price Index rose 1.4% in May, a minor deceleration from the 1.5% growth rate seen the two months prior. Monthly home price appreciation reached a record high of 1.9% in February.

When you look at price trends over the past year, though, the upward trajectory is still significantly strong. Home prices grew 18.3% annually between May 2021 and May 2022 — that’s a far cry from the yearly growth rate seen in a healthy market, which is around 3%.

“House prices continued to rise in May, but at a slower pace,” FHFA supervisory economist Will Doerner says in a statement. “Since peaking in February, price appreciation has moderated slightly. Price growth continues to remain above historical levels, supported by the low inventory of properties for sale.”

There you have it: Doerner suggests that stubbornly high housing prices are partly caused by the continued housing supply challenges highlighted in last week’s column. However, the good news is that inventory may begin to normalize as purchase demand tapers down.

The adjustment won’t happen overnight, though. Sellers are still setting lofty expectations based on the hot housing market of 2021, when buyers were incentivized by record-low mortgage rates. Though much higher interest rates have pulled back demand, median listing prices remained 15.9% higher this July than they were a year ago, according to a recent report from Realtor.com.

“Prices adjust really slowly,” Realtor.com’s chief economist, Danielle Hale, says in a news release. “Sellers are shaped by recent experiences. Before we see prices start coming down, we’re going to have to see sellers stop shooting for the moon.”

In the meantime, all today’s homebuyers can do is wait for sellers to come back down to earth.

[READ: How to Get Approved for a Mortgage]

More from U.S. News

Mortgage Rates Spike as Stubborn Inflation Persists

Climbing Mortgage Rates Leave Many Buyers ‘Priced Out’

Mortgage Rates Tumble Amid Recession Unease

Higher Mortgage Rates Haven’t Slowed Home Price Growth — Yet originally appeared on usnews.com

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