If you're a baby boomer, you might not think that current mortgage rates are high — they were higher in the 1980s and '90s, after all. But if you're a younger generation who's experienced historically low mortgage rates during and before the pandemic, you probably wouldn't. Yes, a new normal is beginning, and some people might think it's fine, while others might think it's awful.
“I think the new normal for mortgage rates will be around 6%,” Lawrence Yun, chief economist for the National Association of Realtors, said in an interview with CNBC yesterday. “The Fed has been very clear about its intention to cut rates, and while there will be delays and what doesn't happen this year will certainly be carried over to next year, mortgage rates are not going to fall to 3%, 4% or even 5%… so consumers should expect 6% to become the norm.”
When inflation hit a 40-year high about two years ago, the Federal Reserve raised interest rates multiple times to curb inflation. Inflation has subsided, but it turned out to be more expensive than some had expected. Either way, as interest rates increased, mortgage rates soared. Think about it. In late December 2020, the average interest rate on a 30-year fixed mortgage was in the 2% range, which is of course on the high side. Last October, it was just over 8%. Today, the daily mortgage rate is 6.99%. “Long-term average mortgage rates are around 7%,” Yoon says. “That's where we are today, but it's certainly higher than the past decade, when it averaged 4% or 5%.”
But 6% mortgage rates might not be so bad. Compass CEO Robert Reffkin recently said that mortgage rates below 6% are the magic number that could lure buyers and sellers back. What's worse are home prices. Since the pandemic, home prices have also risen substantially — by more than 40% by most estimates. The same can't be said for incomes. So homebuying capacity has declined across the board, and in Yun's view, the Fed needs to cut rates primarily to support supply.
“What we're seeing is apartment construction activity really starting to decline due to rising financing costs. That could lead to faster inflation in the future due to a lack of supply. So to calm inflation, we need to increase construction and supply in the residential sector,” Yoon said.
He added: “Current high construction financing costs are constraining some developers, which could lead to a housing shortage and drive up future inflation.”
To be clear, there is already a housing shortage, millions of homes missing. Apartment building permits have plummeted nearly 30% since the pandemic, according to a Redfin analysis released yesterday. Needless to say, the supply crisis has been exacerbated to some extent by the lock-in effect, especially since last year, when existing home sales fell to their lowest in nearly 30 years as few people were willing to sell their homes. (Existing home sales are still not thriving, falling on both a monthly and annual basis in May.) But inventory has improved this year. For example, according to Realtor.com's monthly trend report, there were nearly 37% more homes actively selling on a typical day in June than there were a year ago. That's good news.
“As inventory increases, I think home price growth will stall,” Yoon said. “I think there will be a slight uptick, but it's not a strong uptick. We definitely need more stabilization in home prices.” He noted that a recent analysis by Redfin of home prices in May showed signs that “annual growth rates are showing signs of plateauing.” Case-Shiller data for April also showed the pace of price inflation was slowing.
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