Rising Mortgage Rates and Falling Builder Confidence

To combat growing inflation across the country, the Federal Reserve has continued implementing its plan to raise mortgage rates. The average interest rate for a standard 30-year fixed mortgage is 5.25%, a growth of 19 basis points compared to one week ago. Though they are not the historic lows seen throughout the pandemic, homebuyers’ current rates are still reasonable. However, in addition to the increased rates, homebuyers still find increased home prices due to the scorching price growth rates seen over the past year.

Affordability Still Remains Large Hurdle for Buyers

In the short term, increased mortgage rates risk pricing out homebuyers within the real estate market, making it more challenging to secure lending for their home. Further, the Federal Reserve is on pace to continue its hikes on interest rates throughout the year.

Alongside the increasing mortgage rates, home prices continue to soar, and the affordability of homes remains an issue for many buyers. Increased rates lessen the number of buyers who qualify for an affordable mortgage rather than driving prices down. Additionally, increasing home prices are rising faster than wages, putting another strain on affordability.

How Sellers are Responding

With many homebuyers shut out of the market due to increases in mortgage rates and housing prices, sellers are taking note. While the market still strongly leans in favor of sellers, there are signs that the overall market may be cooling the feverish housing prices. Over the last month, about 12% of available listings had a price drop. While this may not have a noticeable impact on current homebuyers, it is a promising sign of a limit to home price growth.

Supply Side Shortages Still Haunting Homebuyers

Throughout the pandemic, the supply of available homes has not kept up with the demand from homebuyers, leading to soaring prices, bidding wars, and waiving protective contingencies to fast-track offers. The shortage stemmed from a response to the Great Recession when new home builds had decreased throughout the 2010s. Enter the pandemic homebuying demand surge from millennials, the largest demographic in the American population. Their demand was met with a shortage of affordable homes due to the lower number of new homes built over the last decade, a major force driving up the price of homes nationwide.

Many then looked to homebuilders to correct the market and address the demand for homes by starting new builds across the country. Supply chain issues and labor shortages proved difficult for home builders to respond to the increased demand. Additionally, industries home builders rely on, such as logging, cannot instantly scale production up or down. Throughout the end of 2021 and moving into the new year, home builders acquired more building permits, signaling an increase in the supply of homes is coming.

Home Builder Confidence Falling

The increased interest rates impact homebuilders as well. The National Association of Home Builders’ (NAHB) monthly confidence index again dropped in April’s report, the lowest level since September 2021. While the metric of the index still rates the conditions as “good” and not “poor” (which they were at the start of the pandemic in Spring 2020), the decrease suggests that builders are worried about the affordability of the homes they are building, especially for many first-time buyers. Supply issues for home builders mean increased materials and labor expenses, leading to higher costs for new homes.

Final Thoughts

Though there is some stuttering for homebuilders to bring in more supply, the long-term effects of the increasing mortgage rates have yet to be seen. The real estate market is an industry most influenced by changes in interest rates. Though the current real estate market climate is not looking favorable for homebuyers, the market may be reaching an inflection point to bring back normalcy and allow more families to achieve homeownership.