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How Rising Mortgage Rates Stand to Impact the Economy

Although interest rates, which weeks ago hit record lows, are only beginning to inch upward, some financial experts believe the trend is "becoming a problem." 

Discussion about rising rates' impact on refinancing has been prolific, but Bloomberg opinionist foresees a potentially more comprehensive effect on the economy at large.

It has been fairly well established that the U.S. housing market was the shining light in the pandemic-induced financial fog the settled over the country in 2020.

But that "pillar," Chappatta notes, "is beginning to crack."

"The red-hot U.S. housing market, fueled by record-low interest rates, is one of the most important stories of the past year when it comes to understanding the sharp rebound in financial markets and the relatively pristine condition of many household balance sheets," he wrote for Bloomberg.com. "The Freddie Mac 30-year fixed mortgage rate started 2020 at 3.72%, just 40 basis points above its all-time low, and plunged to 2.65% by the start of this year. That drop in borrowing costs led to all sorts of astounding figures: The largest quarterly volume of mortgage originations in history; the most refinancing in a year since 2003; the most debt taken on by first-time buyers on record; and a collective $182 billion of home equity withdrawn during 2020, or an average of about $27,000 for each household."

But, at this point, mortgage rates have increased each of the past six weeks, and no one expects a return to those all-time lows of last year.

He discusses the implications on refinance activity, which last week dropped to its slowest pace since September 2020. However, he editorializes, if the refinancing dip were the only issue at hand, his outlook would not be so "murky," he said.

"After all, it was such an active 2020 in the mortgage market that a breather seems only natural," he wrote.

The bigger problem he sees is home price growth driven by a shortage of stock and insatiable demand. Add to that, as we reported last week, most hopeful buyers are entering battles with multiple bidders and have been compelled to pay tens of thousands of dollars over the asking price.

"Rock-bottom mortgage rates certainly helped take the sting out of surging home prices in recent months," Chappatta wrote. "An increase of 50 basis points from a record low might not seem like much, especially when the prevailing 30-year rate is still well below any historical average. But it’s bound to sting when layered on top of much higher house prices and when potential homeowners are increasingly expected to bid above the listing price, stretching the upper limits of their target range."

In fact, the National Association of Home Builders (NAHB) recently released a study revealing that the rise in mortgage interest rates during the past two months has priced more than 1.3 million households out of the market for a median-priced home.

Here's what it looks like to the consumer, Chappatta offered: The median price for a new one-family house sold in the U.S. reached a record high $356,600 at the end of last year, according to the Census Bureau. At the prevailing 30-year mortgage rate of 2.65%, that comes out to a $9,450 annual payment. In January 2019, when the median dropped to a two-year low of $305,400 but average mortgage rates were 4.46%, the yearly cost was about $13,620. Now, with home prices at $349,400 but rates jumping to 3.17%, annual payments total $11,076.

On a brighter note, Bloomberg also has reported that many Americans have increased their savings during the pandemic. Chappatta adds that it is entirely possible homebuilders will step up production and demand will cool.

The bottom line, he says, is that the housing market isn't going to remain the bright spot in a struggling U.S. economy forever.

The full editorial is available at Bloomberg.com.

About Author: Christina Hughes Babb

Christina Hughes Babb is a reporter for DS News and MReport. A graduate of Southern Methodist University, she has been a reporter, editor, and publisher in the Dallas area for more than 15 years. During her 10 years at Advocate Media and Dallas Magazine, she published thousands of articles covering local politics, real estate, development, crime, the arts, entertainment, and human interest, among other topics. She has won two national Mayborn School of Journalism Ten Spurs awards for nonfiction, and has penned pieces for Texas Monthly, Salon.com, Dallas Observer, Edible, and the Dallas Morning News, among others.
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