Red-hot inflation, and the Fed’s now-aggressive efforts to fight it, are pushing up mortgage rates at their fastest pace on record—and potentially putting the squeeze on homebuyers.
Consider this: The average monthly mortgage payment for the median-priced home has spiked by 56% during the past year (see the chart), as the average rate for the benchmark 30-year fixed mortgage has rocketed from 3.08% in late May 2021 to 5.91% today, according to Bank Rate.
In practical terms, that means the mortgage payment on a $350,500 home (the median price in May 2021) ran about $1,500 on average back then. Today, at a median home price of $391,200, buyers are looking at an average monthly payment of more than $2,300.
The outcome: New homeowners can tack on close to $10,000 in additional annual mortgage costs compared to this time last year. And with more Fed hikes on the way, most industry analysts expect still higher mortgage rates in the coming months.
This trend is pouring cold water on the housing market. Earlier this month, before the Fed’s most recent 75 basis point rate hike, softness in purchase and refinance applications dragged a key measure of mortgage loan application volume to its lowest level in 22 years. Additionally, construction on new homes dropped by 14.4% in May—the most significant decline since April 2021 and worse than Wall Street expected. Housing starts now sit at their lowest level since the early days of the pandemic.
Historically, housing market conditions have often been a harbinger of what’s to come as far as the economy’s overall health. At Horizon, we are carefully watching the Fed’s impact on home prices and demand going forward–as well as the ripple effect a big slowdown could have on consumer demand for home goods, the homebuilder sector, and other key economic metrics. How far the Fed takes interest rates from here will have implications for all assets in the coming months.
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