Mortgage interest rates are rising faster than expected, economists are lowering home sales forecasts

A home is offered for sale on January 20, 2022 in Chicago, Illinois.

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The average interest rate on the popular 30-year fixed mortgage hit 4.72% on Tuesday, moving 26 basis points higher since just Friday, according to the Mortgage News Daily.

As a result of the recent rise in rates, economists are now lowering their home sales forecasts for this year.

Most estimates at the end of last year had the average 30-year mortgage rate of 4.5% by the end of 2022, but the war in Ukraine, rising oil prices and inflation have all ignited a fire below interest rates. Last year at this time, rates were around 3.45%

A shift in the political outlook of the Federal Reserve, suggesting far more interest rate hikes than expected, is pushing bond yields higher. The 30-year fixed mortgage loosely follows the interest rate on the 10-year US Treasury Department, which is now at its highest level since May 2019.

“Interest rates have a small chance of peaking before hitting 5% and a good chance of peaking before hitting 6%,” said Matthew Graham, Chief Operating Officer of Mortgage News Daily. “It’s a fast-moving target in this environment, where we legitimately and unexpectedly find ourselves having to worry about inflation for the first time since the 1980s.”

Economists had expected the price to rise only slightly this year, but now that is about to change.

Lawrence Yun, chief economist at the National Association of Realtors, now says he expects the price to hover around 4.5% this year after previously predicting it would remain at 4%. NAR’s latest official forecast is that sales will fall by 3% in 2022, but Yun now says he expects it to fall 6-8% (NAR has not officially updated its forecast).

The rise in interest rates comes on top of an already sizzling housing market. Demand remains strong and supply remains historically low. This has put pressure on house prices, which had already risen by 19% in January year-over-year, according to the latest from CoreLogic.

“It’s a double-edged sword that erodes the affordability of homebuyers, especially beginners,” said Frank Nothaft, chief economist at CoreLogic. “First-time buyers are a significant portion of potential customers, and their share of purchases has dropped from a year ago. We want to revise our home sales forecast a bit lower.”

Home sellers can also adjust their expectations. Asking prices fell slightly last week, according to Realtor.com, despite the competitive market.

“As a potential sign that sellers are aware of buyers’ tightening of budgets as mortgage rates rise, last week’s data showed the first slowdown in price-demanding growth since January,” wrote Danielle Hale, chief economist at Realtor.com.

Hale said she may also want to revise her sales forecast lower, but has not done so yet. She points out that while rising costs can cut down on home sales, there are several set-off factors, such as rent.

“Rapidly rising rents offer no relief and may keep some potential buyers on the hunt for a home so they can lock in the bulk of their housing costs before inflation raises the bar again,” Hale said.

“The demographic is also favorable for the housing market this year with more than 45 million households aged 26-35 years, which are key years for household formation and first-time home purchase. However, the economic considerations for those households are on the way. To be challenging,” she added .

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