Higher mortgage rates could cool housing market

A run-up in mortgage rates in recent weeks is threatening to pump the brakes on the housing market as the increased borrowing costs reduce would-be buyers’ purchasing power.

The average weekly rate on the benchmark 30-year mortgage has risen swiftly since the first week of this year, when it stood at 3.2%. This week it rose to 5.11%, a 12-year high, according to mortgage buyer Freddie

Mac. A year ago, it was 2.97%.

Mortgage rates’ rise follows a sharp move up in 10-year Treasury yields, reflecting expectations of higher interest rates as the Federal Reserve moves to combat surging inflation.

While higher rates could translate into less frenzied competition for homes, most homeowners with a mortgage have locked in ultra-low rates over the years and will have less financial incentive to sell, which could make the inventory crunch even worse.

Consider, out of the roughly 62% of U.S. homes that have a mortgage, some 92% of them have home loan rates at or below 5%, according to CoreLogic. And 57% of those homes have mortgages with rates at or below 3.5%.

“We’re already in record-low inventory,” said Molly Boesel, principal economist at Corelogic. “So that could make the crunch even bigger.”

Boesel estimates that higher rates could lead to 125,000 fewer homes sold this year.

Sales of previously occupied U.S. homes slowed last month to the lowest pace in nearly two years, according to the National Association of Realtors. Lawrence Yun, the NAR’s chief economist, estimates sales could fall 10% this year.