Mortgage Rates Reach Multi-Decade Highs—Now Demand is Falling

Mortgage rates hit their highest point in nearly 23 years last week, and consumers responded accordingly. According to the Mortgage Bankers Association (MBA), mortgage applications to purchase a home were down 27% compared to a year ago, while refinance applications were 21% lower. 

“Overall applications declined, as both prospective homebuyers and homeowners continue to feel the impact of these elevated rates,” says Joel Kan, MBA vice president and deputy chief economist, in a press release.

“Elevated” is certainly one way to put it. The average rate on 30-year, fixed-rate mortgages hit 7.31%—the highest level since late 2000. At the same time, jumbo mortgage rates hit their highest point in MBA’s recorded history (since 2011). 

Clearly, higher financing costs aren’t great for investors, but less competition from homebuyers could certainly be a good thing. The question is, will these trends continue, and if so, for how long? 

All Eyes on the Fed

Mortgage rates have been rising since the Federal Reserve started raising the federal funds rate last March. In fact, since that first rate hike, the average 30-year mortgage rate has gone from under 4% to the 7.31% we see today.

At last month’s meeting, though, the Federal Open Market Committee (FOMC) ultimately decided to pause its rate hikes, keeping the federal funds rate at the 5.25% to 5.50% range it’s been at since July.

Does that pause mean mortgage rates will fall soon? Probably not. The Fed’s move was likely temporary. According to their quarterly projections, not only did FOMC members overwhelmingly indicate another rate hike is on the horizon before the end of the year, but Fed Chair Jerome Powell has also said as much, indicating the group thinks rates will need to be held higher for an extended period of time to help the economy reach that magic 2% inflation rate.

Said Powell in a post-meeting press conference:

“We are committed to achieving and sustaining a stance of monetary policy that is

sufficiently restrictive to bring inflation down to our 2% goal over time. FOMC participants wrote down their individual assessments of an appropriate path for the federal funds rate based on what each participant judges to be the most likely scenario going forward. If the economy evolves as projected, the median participant projects that the appropriate level of the federal funds rate will be 5.6% at the end of this year, 5.1% at the end of 2024, and 3.9% at the end of 2025.”

As of now, CME Group’s FedWatch Tool projects the next rate hike will come at the FOMC’s Dec. 13 meeting. Should that increase come to fruition, it likely means higher mortgage rates for longer—and the same resulting pullback in consumer demand.

Other Factors That Could Play a Role

Interest rates aren’t the only thing that could keep demand low, either. Student loan repayment just resumed as of Oct. 1 (after over three years on pause due to the pandemic), hitting many potential homebuyers in the pocketbook. 

There’s also a United Auto Workers strike, which could put a dent in the economy, as well as a looming government shutdown. While Congress actually passed a last-minute bill to keep the government open this weekend, it will only fund the government until mid-November—right after the Fed’s next meeting (and potential rate hike). 

Related: Today’s Real Estate Risks: What Are Investors Ignoring?

All of these factors could spell financial struggle for American consumers, pushing homebuying demand down even further. MBA actually projects purchase originations to fall by about $5 billion between this quarter and the next and another $34 billion by the first quarter of the year. 

The Bottom Line

Conditions aren’t going to be great for American homebuyers for the foreseeable future. Investors, though—especially those who can pay cash and avoid today’s rising mortgage rates—could be uniquely poised to benefit, enjoying less competition, fewer bidding wars, and, in some places, even lower home prices.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.