Soaring mortgage rates cooling off homebuyers

Levels not seen since 2008 housing crisis adding hundreds of dollars a month

For the past two years, anyone who had a home to sell could get practically any asking price. Good shape or bad, in cities and in exurbs, seemingly everything on the market had a line of eager buyers.

Now, in the span of a few weeks, real estate agents have gone from managing bidding wars to watching properties sit without offers, and once-hot markets like Austin, Texas, and Boise, Idaho, are poised for big declines.

The culprit is rising mortgage rates, which have spiked to their highest levels since the 2008 housing crisis in response to the Federal Reserve’s recent efforts to tame inflation. The jump in borrowing costs, adding hundreds of dollars a month to the typical mortgage payment and coming on top of two years of home price increases, has pushed aspiring homebuyers past their financial limits.

The interest rate on a 30-year fixed rate mortgage has risen to 5.81% from 3.22% in the first week of January, according to mortgage giant Freddie Mac. Officials raised rates by three-quarters of a percentage point in June alone — the largest increase since 1994 — and have signaled that a similarly large move is on the table in July.

“We’ve reached the point where people just can’t afford a house,” said Glenn Kelman, CEO of Redfin, a national real estate brokerage.

More than any other part of the economy, housing — a purchase that for most buyers requires taking on huge amounts of debt — is especially sensitive to interest rates. That sensitivity becomes even more pronounced when homes are as unaffordable as they are now.

While housing does not account for a huge amount of economic output, it is a boom-bust industry that has historically played an outsize role in downturns. The sector runs on credit, and home purchases are often followed by new furniture, new appliances and new electronics that are important pieces of consumer spending.

Home prices are still at record levels, and they are likely to take months or longer to fall — if they ever do. But that caveat, which real estate agents often hold up as a shield, cannot paper over the fact that demand has waned considerably and that the market direction has changed.

Sales of existing homes fell 3.4% in May from April, according to the National Association of Realtors, and construction is also down.

It is a stark change for a market that blossomed soon after the initial shock of the pandemic, which for many people turned out to be a perfect time to buy a home. Rock-bottom mortgage rates lowered borrowing costs, while the shift to home offices and Zoom meetings opened up swaths of the country to buyers who had been struggling to penetrate the market near the jobs they once commuted to.

That caused prices to explode in far-flung exurbs and once-affordable places like Spokane, Washington. People became so willing to move long distances to buy a home that “the normal laws of supply and demand didn’t apply,” Kelman said.