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Rising Mortgage Rates Can Sink the U.S. Housing Market

Last Updated September 23, 2020 1:16 PM
Harsh Chauhan
Last Updated September 23, 2020 1:16 PM
  • The U.S. housing market has been relying on low mortgage rates for growth.
  • Freddie Mac reveals that mortgage rates have been ticking up.
  • Higher mortgage rates could price more buyers out of the market.

The U.S. housing market has been propelled higher by a low 30-year fixed-rate mortgage, but it looks like that party could be over. The latest data from mortgage specialist Freddie Mac  reveals that the 30-year fixed-rate mortgage jumped last week to 3.75% from 3.69% the preceding week.

The rate on the 15-year mortgage also jumped to 3.2% last week from 3.13% in the preceding one. Both rates have been rising in recent weeks.

Freddie Mac chief economist Sam Khater opines that an improved economic outlook and an increase in purchase mortgage applications are healthy signs for the U.S. housing market. However, he seems to be ignoring the obvious red flags that an increase in mortgage rates could trigger in the future.

Higher rates will worsen the recent U.S. housing market downturn

Believe it or not, the U.S. housing market has started showing signs of weakness over the past couple of months. Sales of new homes dipped in September and prices fell despite a tight inventory situation. Existing homes sales also took a beating, declining much more than what analysts were expecting.


Analysts believe that high home prices and tight inventories are to blame for the September downturn. And what’s alarming is that the situation might not improve in the near-term after September housing starts witnessed a sharp downturn. The October numbers are yet to be released.

But if there’s another decline in housing starts, more buyers could get priced out of the market thanks to a lack of supply.

Home buyers have been relying on low mortgage rates to buy homes. That’s because home prices have been shooting through the roof over the years while wage growth hasn’t kept pace. In such a scenario, buyers could refrain from buying new homes thanks to higher mortgage rates.

Home buyers will get nervous about buying a new house

A recent report from the National Association of Home Builders reveals that just 21% of those  who are looking to buy a new house think it’s becoming easier to purchase one. Consumer perception about housing affordability will worsen as mortgage rates rise and supply remains tight.

Meanwhile, the economic outlook for the U.S. isn’t all that bright, and this does not bode well for the housing market. According to a forecast from the New York Fed, the U.S. economy might record just 0.4% growth  in the fourth quarter. The Atlanta Fed is even more bearish with a forecast of 0.3%. These models tell us that the U.S. economy might end up stagnating by the end of the year, denting consumers’ confidence and forcing them to become stingy.

If U.S. economic growth eventually comes to a standstill, people will prefer living in their existing homes than buying a new one. According to a report, an average American now stays in their house for 13 years . This is a big jump from the average of just eight years that was seen nine years ago. This leads to a decline in the inventory of existing homes on the market, causing prices to surge.

On the other hand, the decline in U.S. housing starts means that there will be a shortage of new houses on the market as well. Inventory levels will continue to get tighter in such a situation and price more buyers out of the market as mortgage rates rise.

Eventually, the sellers might have to offload their inventories on the cheap and cause further declines in prices. As such, the uptick in mortgage rates is a bad omen for the housing market given the adverse economic conditions and the huge level of debt that households already have .

This gives us another reason to believe that a U.S. housing market crisis is imminent.