What 7% Mortgage Rates Mean for Home Prices and Investors
Mortgage rates have climbed back to around 7%, bringing renewed attention to the housing market and the broader impact of higher interest rates. For prospective homebuyers, homeowners and investors, changing rates can affect everything from affordability and housing activity to consumer spending and investment decisions.
In this market update, Rich Stoeckel of Boyum Wealth Architects takes a closer look at several key housing and economic trends to provide context for the current environment.
30-Year Mortgage Rates
The 30-year fixed mortgage rate has generally been on a long-term declining trend since 1990, with particularly low rates becoming common following the 2008 financial crisis. For much of the past 15 years, borrowers benefited from historically low mortgage rates.
That environment changed as the Federal Reserve raised interest rates to address inflation. Mortgage rates moved significantly higher, and today’s rates are a considerable departure from the rates many homeowners secured during the pandemic.
This has also created what is sometimes called a “lock-in effect.” Homeowners who obtained mortgages in the high-2% or low-3% range may have less incentive to sell and take on a new mortgage at a substantially higher rate. This can contribute to lower housing inventory and reduced home sales.
Home Prices Remain Elevated
Mortgage rates are only one part of the housing market. Home prices have also increased significantly over the past several decades.
The S&P CoreLogic Case-Shiller Home Price Index, which tracks changes in residential real estate prices, illustrates the long-term increase. After declining during the 2008 financial crisis, home prices accelerated considerably in the years following the pandemic.
Higher mortgage rates can put pressure on housing demand, but elevated home prices have not necessarily resulted in widespread mortgage distress. Employment levels and household finances remain important factors in determining how homeowners respond to higher borrowing costs.
Refinancing Activity Has Declined
Refinancing activity generally moves with mortgage rates. When rates fall, homeowners have more opportunities to replace existing mortgages with loans carrying lower interest rates. When rates rise, the financial incentive to refinance generally decreases.
With mortgage rates remaining elevated, refinancing activity has declined from the levels seen when rates were lower. This can also affect the ability of households to access home equity through cash-out refinancing, potentially influencing consumer spending.
At the same time, household debt payments remain relatively manageable compared with the period leading up to the 2008 financial crisis. This provides additional context when evaluating the current housing environment.
What Does This Mean for Investors?
Interest rates can have a meaningful impact on financial markets and the economy, but predicting where rates will go next is difficult. Expectations for Federal Reserve policy can change as economic conditions evolve, and rate forecasts made earlier in the year may look very different several months later.
For long-term investors, this is an important reminder that investment decisions generally shouldn’t be based solely on attempts to predict the next interest rate move.
Interest rates are an important economic indicator and can be one factor in a broader financial plan. However, maintaining a long-term perspective and considering your individual goals, time horizon and financial circumstances can help put short-term market and economic changes into context.
Watch Rich Stoeckel‘s latest market update for a closer look at mortgage rates, home prices, refinancing and what these trends may mean for investors.