Existing home sales have declined for seven straight months as the rising cost to borrow money puts homes out of reach for more people.

Many potential homebuyers are opting out of the housing market as the higher 30-year mortgage interest rates add hundreds of dollars to monthly mortgage payments. On the opposite side of the transaction, many homeowners are reluctant to sell as they are likely locked into a much lower rate than they’d get on their next home mortgage.

Rapidly rising 30-year mortgage interest rates threaten to sideline even more prospective homebuyers. Last year, prospective homebuyers were looking at 30-year mortgage rates well below 3% APR.

Mortgage buyer Freddie Mac reported that the 30-year rate climbed to 6.29%. That’s the highest it’s been since August 2007, a year before a crash in the housing market triggered the Great Recession.

“The rising mortgage rate has clearly hampered the housing market,” said Lawrence Yun, chief economist. “The housing sector is the most sensitive to and experiences the most immediate impacts from the Federal Reserve’s interest rate policy changes.”

Sales of existing homes fell 19.9% year-over-year from August last year, and are now at the slowest annual pace since May 2020, near the start of the pandemic, according to NAR.

The national median home price jumped 7.7% in August from a year earlier to $389,500. As the housing market has cooled, home prices have been rising at a more moderate pace after surging annually by around 20% earlier this year. Before the pandemic, the median home price was rising about 5% a year.

The August home sales report is the latest evidence that the housing market, a key driver of economic growth, is slowing from its breakneck pace in recent years as homebuyers grapple with the highest mortgage rates in more than a decade, as well as inflation that is hovering near a four-decade high.

Higher home prices and mortgage rates have pushed mortgage payments on a typical home from $897 to $1,643 a month, an 83% increase over the past three years, according to an analysis by real estate information company Zillow.

Some 85% of US homeowners with a mortgage now have an interest rate well below 6%, according to Redfin. The disparity gives less incentive to these homeowners to sell and buy another home, because taking on a higher mortgage rate would mean paying more over the life of the loan and also as bigger monthly payment.

By raising federal funds borrowing interest rates, the Federal Reserve makes it costlier to take out a mortgage loan. Consumers then presumably borrow and spend less, cooling the economy and slowing inflation*.

Mortgage rates don’t necessarily mirror the Fed’s interest rate increases, but tend to track the yield on the 10-year Treasury note. That’s influenced by a variety of factors, including investors’ expectations for future inflation and global demand for US Treasurys.

References:

1. https://www.nar.realtor/newsroom/existing-home-sales-slipped-0-4-in-august
2. https://nypost.com/2022/09/22/mortgage-rates-jump-to-6-29-highest-in-15-years/
3. https://www.zillow.com/research/august-existing-home-sales-2022-31458/
4. https://nypost.com/2022/09/21/existing-home-sales-drop-for-7th-straight-month-in-august/

*August’s CPI data showed that inflation is not slowing as expected and required the 75-basis point interest increase from the Federal Reserve. In addition, jobless claims showed a persistently tight labor market, which could drive up costs of goods and services as wages increase.