Tue. Sep 26th, 2023
    The Impact of Rising Mortgage Rates on the Housing Market

    The national average rate on the 30-year fixed mortgage rose to 7.48%, the highest level since November 2000, causing concerns about the affordability of housing, especially for first-time buyers. This increase in mortgage rates is primarily due to a rise in bond yields. As a result, potential homeowners may be less likely to move or purchase new homes, as they would have to give up their lower mortgage rates for higher ones.

    This situation creates a feedback loop where housing supply remains tight, leading to higher prices, inflation, and further increases in mortgage rates. Some borrowers are considering adjustable-rate mortgages (ARMs) with lower interest rates for a few years before changing to fixed-rate terms. However, even the five-year ARM was quoted at 6.2% last week, raising concerns that borrowers could face financial difficulties when their loan converts to a fixed rate.

    The real estate industry is a significant contributor to job creation, and a slowdown in real estate sales could potentially trigger a recession. Each real estate transaction involves various professionals, such as realtors, closing agents, inspectors, appraisers, and mortgage companies. Therefore, curbing real estate sales could be a strategy for the Federal Reserve to slow down employment numbers.

    Despite these challenges, there are subsectors within the real estate industry that may benefit from higher mortgage rates. Rental properties, such as apartments and single-family homes, are expected to have stable or increasing demand as buying a home becomes more difficult. Homebuilders are adapting to this trend by constructing apartment and rental townhome complexes. Additionally, self-storage REITs may benefit, as smaller properties often lack sufficient storage space.

    The future of the real estate market depends on several factors. One potential solution would be for the Federal Reserve to reconsider its inflation target and raise it above 2%. This could halt the cycle of rate hikes and potentially make housing more affordable. Alternatively, a recession that leads to a decline in home values could also increase affordability for a wider range of individuals.

    Overall, while rising mortgage rates present challenges for the housing market, certain sectors within the real estate industry may continue to thrive in the current economic climate.

    – “High mortgage rates help real estate investment trust (REIT) subsectors” – Raymond James analyst Buck Horne
    – Weekly REIT Report – Benzinga’s in-house real estate research team