The broader economy showed signs of recovery last week, pushing the average mortgage rate for a 30-year fixed loan up eight basis points to 3.17%, according to Freddie Mac’s Primary Mortgage Market Survey
Since January, mortgage rates have increased roughly 50 basis points from historic lows and home prices have risen, leaving would-be homebuyers with less purchasing power. Unfortunately, this disproportionately affected the low end of the market, where supply is the slimmest, said Sam Khater, Freddie Mac’s chief economist.
“During the course of the pandemic, ‘home’ had become more important than ever, and as a result, strong purchase demand continues—but buyers also outnumber the sellers,” Khater said.
Mortgage applications decreased for the third straight week on Wednesday, according to the Mortgage Bankers Association, as rising mortgage rates pushed refinance activity down to its slowest pace since September 2020. That’s a full 5% drop.
Many economists speculate rising rates will be the key to quelling construction woes, even if it does eventually take a slight toll on demand. Even a slight quarter turn in rates will cause many borrowers to wait out the market. As they do, home builders can seize the opportunity to catch up. With greater supply comes lower home prices, and with them, a stabilization of building costs.
The uptick in rates, coupled with limited supply and rising home prices, did in fact deter some homebuyers last month. Sales of existing homes fell 6.6% in February to a seasonally adjusted annual rate of 6.22 million, according to the National Association of Realtors. At the current rate, unsold inventory sits at a mere 2 month supply, and it’s even lower than that in some of the country’s hottest housing market.
New home sales, which are more likely to be affected by rising rates, plummeted 18.2% month-over-month.
“New home sales from 2018 showed us that mortgage rates of 4.75% to 5% create a supply shock and caused builders to back off construction,” said Logan Mohtashami, HousingWire’s lead analyst. “We are far away from those mortgage rate levels right now, but you have to know your limits with new home sales.”
One potential bright spot is that many Americans have been saving money over the past year. There’s a strong possibility that once the country fully reopens, those reserves will strongly bolster the economy. Demand has yet to be contained as the market is still outperforming pre-pandemic levels with sales 9.1% higher existing home sales than a year ago.