Mortgage Rates and the Economy

Mortgage rates surged to 6.02% this week. This is the highest rate we’ve seen on 30-year fixed rate mortgages since November 2008, and it’s 2.80 percentage points higher than the beginning of the year.

So why does this matter? And what are the implications?

It matters because the housing market can be a direct reflection, and has a direct impact on the economy.

Housing Starts Matter

The housing market is driven by housing starts and home sales. Housing starts track the number of new residential construction projects that begin each month. Because people are more likely to buy new homes in healthy economies, housing starts are one indicator of a healthy economy. Housing starts impact mortgage production, raw land appreciation, raw materials, and they drive employment. And all of this is good for the economy when housing starts are strong.

Home Sales Matter

Overall home sales are also tied to economic health. As they rise and fall, they ultimately drive economic activity. When economic activity drops, the supply of money tends to tighten, and money becomes harder to borrow. As interest rates rise, fewer buyers are available to absorb the supply of housing inventory. And greater supply caused by lower demand generally drives prices down.

Interest Rates Matter

Interest rates are critical to the overall health of the housing market. If interest rates are too low, as they were in 2019, 2020 and 2021, housing prices can artificially inflate by pulling too many buyers into the demand pool. If interest rates rise too quickly, the demand pool drops, housing starts and home sales dry up, and the inevitable market correction or a potential housing crash can occur.

The abrupt shift in the housing market this year is sure to have an impact on our economy.

Higher rates are driving down demand

Demand for mortgages hit a 22-year low in August, according to the Mortgage Bankers Association’s survey for the week ending Sept 9, as purchase and refinance activity continued to decline.

With home prices at artificially high levels, the higher interest rates are driving affordability to its worst level in 37 years, according to mortgage technology and data provider Back Knight.

According to the Federal Reserve Bank of St. Louis, the median home sales price currently stands at $428,700. While that is an increase of $58,900 from just a year ago, the average home price may not be sustainable. And that comes down to affordability.

Back in January of this year, when mortgage rates were around 3.2%, a family could put down 20% on a $428,700 house and have a $1,567 monthly mortgage payment. That same $428,700 house purchased today, with a 6% mortgage rate would require a $2,140 monthly payment. That’s a huge shift from what we saw nine months ago.

At today’s interest rates, the $1,567 monthly payment would now purchase a $310,000 house (assuming a 20% down payment). We are not saying that $428,000 homes are going to drop in value to $310,000. But we saying that home values are unlikely to remain this high if mortgage rates remain north of 6%.

The median home price for active listings has been falling since the June peak, according to Realtor.com. While the recent month-to-month decline was the sharpest decline registered in six years, home prices remain 14.2% up from a year ago.

So what are we saying?

We are saying “Be Careful!” And prepare for a potential repricing of all financial assets.

When combing a potential slowdown in housing, high inflation, the Fed’s too-little-too-late interest rate hikes, and all the other chaos around the world today, these elements have the potential to slow down our economy and negatively impact the value of all financial assets going forward.

Having the right strategic financial partner in place can help to avoid unpleasant surprises with the right preparation. To learn more about how Monotelo can help you plan for the future, click below.

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