Here's Just How Difficult It's Getting for Home Buyers

Mortgage rates, now at a 20-year high, combined with inflation and stock market volatility are causing housing markets to soften quickly. The next several months will be a critical test for the economy, experts say.

Consumers are facing economic pressure from every angle—rising mortgage rates, stubbornly high inflation, a battered stock market—and the financial environment keeps getting worse for aspiring homeowners who want to buy. With mortgage rates averaging 6.92% this week—the highest they’ve been since April 2002—“people need to earn $40,000 more in order to afford the median-priced home compared to a year earlier,” Nadia Evangelou, senior economist and director of forecasting for the National Association of REALTORS®, writes on the Economists’ Outlook blog.

Making matters even more difficult, Evangelou writes, “the salary of the typical American has only increased by $2,300 in the last 12 months. For prospective first-time home buyers, it’s a double-whammy. It’s not just mortgage rates. Rents continue to escalate while nearly half of the renters are already cost-burdened.” In September, consumer prices increased by 8.2%, and rents surged by 7.2%—the fastest pace in 40 years. The pressure is causing more housing markets to plummet from record highs this past spring.

Also at issue for consumers is the Federal Reserve’s tactics to tame inflation, says NAR Chief Economist Lawrence Yun. “Even with an economic recession looming, the Federal Reserve is unlikely to let up on its aggressive monetary policy of raising interest rates,” Yun says. “The 10-year Treasury yield broke past 4%, and mortgage rates will be fighting to hold at a 7% average in the upcoming weeks. People’s IRA and 401(k) retirement accounts are quickly vanishing.”

The Fed’s goal is to cut consumer demand to reduce inflationary pressure, but Yun says increasing supply also will help inflation come down. “America has to produce more of everything, from building more homes and industrial spaces to drilling for more energy and manufacturing more electric cars,” he says. “The 3 million Americans who left the workforce since the pandemic need to be incentivized to get back to work.”

Until then, the economy is at a crossroads. “We continue to see a tale of two economies in the data: 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,” says Sam Khater, Freddie Mac’s chief economist. “The next several months will undoubtedly be important for the economy and the housing market.”

Freddie Mac reports the following national averages with mortgage rates for the week ending Oct. 13:

  • 30-year fixed-rate mortgages: averaged 6.92%, with an average 0.8 point, rising from last week’s 6.66% average. Last year at this time, 30-year rates averaged 3.05%.
  • 15-year fixed-rate mortgages: averaged 6.09%, with an average 1.1 point, increasing from last week’s 5.90% average. A year ago, 15-year rates averaged 2.30%.
  • 5-year hybrid adjustable-rate mortgages: averaged 5.81%, with an average 0.2 point, also increasing from last week’s 5.36% average. A year ago, 5-year ARMs averaged 2.55%.
Freddie Mac reports commitment rates along with average points to better reflect the total upfront cost of obtaining a mortgage.