The national average interest rate on the 30-year, fixed-rate mortgage in the U.S. reached 7.09 percent last week, the Federal Home Loan Mortgage Corp. reported, up from 6.96 percent the week before to reach its highest since April 2002.

Mortgage rates are strongly influenced by the yield on the 10-year treasury note, which on 16 August reached 4.258 percent, its highest since June 2008.

The lofty mortgage rate is expected to shrink home sales further as prices remain high due to a relative shortage of houses for sale.

The U.S. Federal Reserve had kept interest rates low through the Great Recession and its aftermath, then lowered them further during the COVID War. Now homeowners holding those low-rate mortgages are reluctant to sell, shrinking the supply of existing homes on the market.

Sales of existing homes in June were down 18.9 percent, year on year, the National Association of Realtors (NAR) reported, with the national average price at $410,200, down only slightly from the record of $413,800 a year earlier and the second highest since the NAR began keeping records in 1999.

To understand the impact of high-interest rates, imagine a buyer purchasing a $500,000 home with 20 percent down and taking a mortgage for $400,000.

A 4-percent mortgage rate would cost about $290,000 in interest over the life of the loan. In contrast, a 7-percent rate would boost that cost to roughly $560,000—almost double.

The market is unlikely to cool, even if the Fed keeps interest rates where they are, analysts say.

On 15 August, Goldman Sachs revised its outlook for home prices, saying they will rise 1.8 percent this year and 3.4 percent in 2024. 

With existing homes scarce on the market, buyers are turning to newly built houses. Sales in that sector of the market are up 24 percent over the 12 months ending 30 June, the census bureau said. 

However, most of the new homes are in higher price brackets where buyers more easily afford hefty down payments and higher monthly mortgage installments, NAR chief economist Lawrence Yun said in a statement.

Mortgage rates will fall toward 6.5 percent, perhaps as early as later this year and definitely before summer 2024, Yun predicted.

However, rates are likely to stay elevated for some time, analysts agree. 

“Across the board, most consumers are on the sidelines,” Arnell Brady II, senior loan officer at Bay Equity Home Loans, told The Wall Street Journal. “They’re waiting for the market to improve before they jump back in.”

TREND FORECAST: As we forecasted in articles such as “Home Prices Set Yet Another Record While Sales Fall” (26 Apr 2022), higher interest rates helped bring home prices down, but not to a great degree.

The new homes being built are high-priced and mortgaged at high-interest rates. Those rates are widely expected to come down next year. When they do, more of today’s reluctant sellers will make their moves. 

As a result, more homes will come onto the market and some portion of today’s home buyers will find themselves under water, owing more on their homes than the houses are worth.

The problem will not be widespread. The U.S. Federal Reserve will lower its key rates gradually and mortgage rates will follow. Today’s high-cost buyers will refinance, which will lower their monthly payments but not raise the value of their homes.

Therefore, some number of today’s home buyers are likely to be locked into their current residences for the foreseeable future.

That, in turn, will continue a longer-term trend we also have flagged in articles such as “Median U.S. Home Price Sets Another Record” (29 Jun 2021) and “Home Prices Up, Incomes Down” (16 Nov 2021): younger buyers will have an increasingly difficult time-saving cash for a down payment on a house and an equally difficult time qualifying for an affordable mortgage.

At least one generation of Americans will spend their lives as renters, denied the satisfaction—and potential financial rewards—of owning a home of their own.