The national average interest rate on a fixed-rate, 30-year mortgage nudged up to 6.92 percent on 13 October, climbing from 6.66 percent a week ago to its highest since April 2002, the Federal Home Loan Mortgage Corporation (Freddie Mac) announced.

Rates have more than doubled this year, rising from 3.05 percent a year ago. Some lenders are setting rates above 7 percent, The Wall Street Journal noted.

Mortgage rates have risen with the U.S. Federal Reserve’s key federal funds rate as the central bank hikes rates in an attempt to control inflation.

A buyer earning the median U.S. household income and making a 20-percent down payment could afford a home costing $339,000 last week, according to Realtor.com. 

In January, the same buyer making the same down payment could have afforded a house priced at $449,000, Realtor.com calculated.

In August, the median sales price of an existing U.S. home was $389,500,  according to Realtor.com, and has fallen to $379,725 by mid-October, according to online brokerage Redfin.com.

Higher rates are chilling the housing market.

During the four weeks ended 9 October, 7.9% of home listings cut their prices, according to data from Redfin, a record number and almost twice as many as the 4 percent that reduced asking prices during the same period last year.

“The second sharp rate increase this year, together with nerves about inflation and the direction of the economy, is dragging home-sale activity down further than it was over the summer and pushing homebuyer sentiment down near its all-time low,” Redfin’s deputy chief economist Taylor Marr said in comments quoted by The New York Post.

“We see a tale of two economies in the data,” Sam Khater, Freddie Mac’s chief economist, said in a statement.

“Strong job and wage growth are keeping consumers’ balance sheets positive, while lingering inflation, recession fears, and housing affordability are driving housing demand down precipitously.”

During the first week of October, applications for new mortgages were 39 percent fewer than a year earlier, the Mortgage Bankers Association reported.

The number of pending home sales is 28 percent fewer than a year ago, the steepest annual decline since May 2020 when the COVID War began.

The number of interest rate locks buyers requested has declined 30 percent since June and 60 percent year on year, The Wall Street Journal reported.

TRENDPOST: We had forecast for more than a year that the housing market would turn down sharply when the Fed raised its interest rate to or above 1.5 percent. The Fed has now raised its key interest rate to a range of 3 to 3.25  percent, sending mortgage rates in many areas above 7 percent. 

Again, this housing bubble was artificially inflated with record low interest rates and not because the middle class was growing because their wages were rising. Therefore, it is simple math. The higher mortgage rates rise, the deeper home prices will fall.

TREND FORECAST: With inflation not abating and consumers draining their savings, which we highlighted in “U.S. Consumers Keep On Spending As Savings Rate Plummets” (31 May 2022) and “Americans: Spending More, Saving Less” (7 Jun 2022), the U.S. housing market will collapse should mortgage rates hit double digits.

The hardest hit will be first time home buyers who made up just 27 percent of all transactions, down from 31 percent a year ago and dropping to a 13 year low it hit during the Great Recession.

Again, minus a wild card event, while we do forecast a steady drop in home prices in major markets, we do not forecast a housing market crash. Unlike the Panic of ’08, this time, many homes were paid for with cash and mortgage balances are lower now than then. Therefore, there will be no subprime fiasco that artificially drove up home prices like they did back then from people who could not afford to own them.