As interest rates continue to rise, some of the buyer frenzy that has dominated the housing market during the last few years is starting to calm—but not as much as expected.
Mortgage interest rates have been on an upward trend since the start of the year, though there has been a recent drop, according to Freddie Mac data. Across the U.S., the weekly average interest rate for 30-year fixed-rate mortgages stood at 5.3%, as of the week ending July 7—up from 2.9% as of the week of July 8, 2021.
Meanwhile, 15-year fixed-rate mortgages increased to 4.45% —up from 2.2%, as of the week ending July 8, 2021. Five-year adjustable-rate mortgages (5/1-Yr ARM) stood at 4.19%, up from 2.52% a year prior.
The rising rates have led some buyers who were sitting on the fence to make a purchase because they fear the rate hikes will continue, said Ryan Bennett, Colorado, Arizona and New Mexico regional manager for BOK Financial MortgageSM. Yet other buyers are taking a wait-and-see approach, he said. "They see the rates as a shock to the market, but eventually this environment becomes more of a norm and then buyers come back."
Home sales, but not yet prices, falling as interest rates rise
Indeed, home sales have been returning to pre-pandemic levels, according to data from the National Association of Realtors. In May, sales of existing homes declined for the fourth month in a row, to a seasonally adjusted annual rate of 5.41 million. Sales were down 3.4% from April and 8.6% from May 2021.
And yet, home prices remain high nationwide. Prices were up 20.4% from April 2021 to 2022, according to the most recent S&P CoreLogic Case-Shiller Index, which tracks residential real estate prices. Month-over-month, there was a 2.1% increase (not seasonally adjusted) in home prices in April, according to the index.
Those prices will ultimately come down, the experts say. According to Freddie Mac estimates, for every one percent increase in mortgage rates, home sales will slow by roughly 5% and price growth will slow by four-to-six percentage points, after an initial bump from buyers trying to lock in current rates.
"The first one- to one-and-a-half percent increase this year didn't have a real impact on prices and home sales because rates were so low to start with," Bennett said. "But as you start ratcheting up rates, that 5% decrease is probably going to become a true statement."
And the interest rate hikes likely will continue. So far, the Federal Reserve has increased the Federal Funds rate, which determines how expensive it is for financial institutions to borrow money, three times in 2022. It now stands at 1.75%.
Another rate hike is expected July 27, potentially followed by more hikes in September, November and December. Although mortgage rates don't directly track the Federal Funds rate, they do tend to go up or down along with it because as it becomes more expensive for financial institutions to borrow money, they in turn tend to set higher rates for consumer borrowing.
Still a sellers' market, but less so
Despite home sales falling nationally, it's still a sellers' market, but buyers are closing deals with fewer of the extremes they've endured in the past two years, experts agree.
"We're seeing fewer bidding wars. We're seeing fewer buyers saying, 'Hey, we'll take the house, no matter what,'" said Tanya Ball, regional manager for BOK Financial Mortgage. She oversees the Oklahoma, Arkansas, Kansas and Missouri markets. The incidence of buyers paying closing costs also has "slowed down considerably," she noted.
The market is reaching more of an equilibrium, with aspects of a normal market, such as sellers' concessions, likely to return, Bennett said. "Sellers are having to come back to reality where you actually have to clean your house up for a showing. You actually have to clean the yard up."
“Sellers are having to come back to reality where you actually have to clean your house up for a showing. You actually have to clean the yard up.”- Ryan Bennett, BOK Financial Mortgage regional manager
Buyers, meanwhile, should be wary of just chasing the lowest rate, Ball noted. Lenders know that people are focused on interest rates, so some are advertising low rates while charging high costs overall, she explained.
"The focus should be on the big picture. You've got to date the rate and marry the house," she said. "The interest rate is very temporary. You can refinance it, but if you love your house, that's really, truly what is the most important."
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