Rising Mortgage Rates Prompt Downward Revision to Home Price Forecasts

A home is offered for sale in Chicago, on Jan. 20, 2022. Scott Olson/Getty Images

A sharp run-up in mortgage rates has prompted speculation about possible cooling in house prices in the red-hot U.S. market, with real estate research firm Zillow lowering its home price forecast for 2023 by 1.6 percentage points.

Home prices have been on a tear amid broader inflationary pressures in the U.S. economy, with the most recent S&P Corelogic Case-Shiller Index showing a 19.2 percent year-over-year home price gain in January, the fourth-largest reading in the 35-year history of the data series.

But a rapidly evolving macroeconomic environment, with surging inflation prompting the Federal Reserve to embark on a path of monetary tightening in a bid to cool runaway prices, is driving speculation that home price dynamics will soften.

“Declining COVID cases and a resumption of general economic activity has stoked inflation, and the Federal Reserve has begun to increase interest rates in response. We may soon begin to see the impact of increasing mortgage rates on home prices,” Craig J. Lazzara, Managing Director at S&P DJI, said in a statement.

Faster Rate Hikes ‘On The Table’

The Fed in March raised its benchmark interest rate by 25 basis points, and Federal Reserve Chair Jerome Powell said on Thursday that a half-point interest rate hike would be “on the table” when the policymakers meet in May.

Powell added it would be appropriate to “be moving a little more quickly” to tighten monetary setting as the central bank scrambles to contain inflation, which is running at a 41-year high.

Treasury yields, which tend to track mortgage rates, have risen sharply recently, with the 10-year touching 2.94 percent on Tuesday, the highest level since 2018.

A year ago, the benchmark 30-year mortgage stood at 2.97 percent. This week, mortgage buyer Freddie Mac reported that it rose to 5.11 percent, a 12-year high.

The run-up in rates has led mortgage refinance demand to drop 68 percent compared to a year ago and down 8 percent from the previous week, according to the Mortgage Bankers Association (MBA).

“The recent surge in mortgage rates has shut most borrowers out of rate/term refinances, causing the refinance index to fall for the sixth consecutive week,” Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting, said in a statement.

“In a housing market facing affordability challenges and low inventory, higher rates are causing a pullback or delay in home purchase demand,” Kan added.

Climbing mortgage rates have prompted real estate research firm Zillow to reduce its forecast for how fast home prices will rise next year.

Zillow’s year-ahead forecast of 16.5 percent annualized home price growth in February has been downgraded to 14.9 percent.

Driving the downwardly revised forecast are affordability headwinds that have strengthened faster than expected, largely due to sharp increases in mortgage rates,” Zillow researchers said in a statement, adding that there were downward risks to the outlook.

“Inventory levels remain near record lows, but have the potential to recover faster than anticipated, which could lower future price and sales volume projections,” they said.

Other housing market data suggest potential cooling going forward.

Inventory Edges Up

U.S. single-family homebuilding and permits tumbled in March, the Commerce Department said Tuesday, while a Monday report showed that sentiment among single-family homebuilders dropped to a seven-month low in April.

In March, there was a 2-month supply of housing inventory at the current sales pace, according to the National Association of Realtors, up from 1.7 months in February. Experts say that a balanced market is when there’s around 6.5 months of supply.

With expectations that mortgage rates will climb further, Lawrence Yun, NAR’s chief economist, predicts a 10 percent decline in home purchase transactions this year, along with some readjustment in house prices.

“The housing market is starting to feel the impact of sharply rising mortgage rates and higher inflation taking a hit on purchasing power,” Yun said. “Still, homes are selling rapidly, and home price gains remain in the double-digits.”

The median price for a previously occupied home climbed to $375,300, up 15 percent from a year ago and a new record high, according to NAR.