The effects of high mortgage rates on home purchases in the U.S.

In October 2023, home sales in the United States dropped to its lowest since October 2010. This is essentially due to the thirty-year mortgage rates climbing to its highest in more than twenty years. National interest rates tracker by Forbes pegged the thirty-year mortgage rates at 7.74%, up from 7.50% recorded during the second week of November. 

The jump in the mortgage rates is not only dissuading potential homebuyers from accessing ownership of properties, it is also forcing current homeowners to retreat from listing their properties for sale. They are uncertain about affording the higher mortgage costs required to purchase new homes. For instance, the middle of October 2023 saw home purchases fall to its lowest since 1995 and it recorded a 21% decline in purchasing applications compared to the same time last year.

Existing home sales in 2023 also recorded declines consecutively from March – October, with a 2% decline in September 2023. New home sales are also affected by this decline. According to data by the US Wealth Management, sales of new homes declined for a while, however, it is recently on course to recover. 

The Complicity of the Federal Reserve (Fed)

In order to slow down mounting inflation rates and improve the economy, the Federal Reserve (Fed) hiked short-term interest rates from 5.25% to 5.50% during the second quarter of this year. The hike changed the terrain of the property market, as the mortgage rates expectedly reacted sharply to it. The pattern of this simultaneous reaction could be traced back to early 2022, when the Fed’s new monetary policy took effect leading to gradual increase of short-term interest rates with a target to clamp inflation down to 2%. 

The hike simultaneously led to the steady increase of mortgage rates to nearly approaching 8%, the highest since two decades. While the Fed does not set mortgage rates, it appears that its monetary policies affect the rates. For instance, mortgage rates appear to track interest on the ten-year treasuries bond, and the movement of these bonds is influenced by monetary policies of the Fed and investors’ reaction to these policies. 

Hope in the Horizon

While the Fed has not ruled out the possibility of a further hike in the short-term interest rates, decent growths in the economy, such as the jobs report of October which revealed growth in the jobs market and the economy as it added 150,000 in October, might further strengthen the confidence of policymakers that the economy is witnessing growth and that there is no need to hike interest rates in the coming months. 

As Jiayi Xu, an economist at realtor.com notes, “as the possibility of a rate hike remains on the table, investors are likely to exercise caution in their positioning, and the expectations for (mortgage) rates to stay steady to slightly higher remains.” Thus, reversal or slight reversal of the hike can have the effect of clamping down the mortgage rates to a manageable level and increasing home purchases.  The accuracy of this proposition is especially highlighted by the 2.5% increase in home purchase applications as the mortgage rates slightly dipped during the last of October.