How Rising Mortgage Rates Are Affecting the Housing Market

Luis Solis, a real estate agent in Portland, Ore., marked a milestone weekend late last month. It was the first time in two years that one of his listings made it to Monday without any offers.

This particular house was listed at $500,000, and after a Saturday open house there were promises of at least three bids, including one for $40,000 over the asking price. Then Monday came, and there were none. Then Tuesday, and Wednesday. An offer finally came in, but instead of being 10 to 15 percent higher than the listing — something that became almost standard at the height of the coronavirus pandemic’s housing market — it was right at $500,000. And it was the only one. And the buyer took it.

“We didn’t have the competing offers that would drive up the price,” Mr. Solis said. “It’s not crazy like it was.”

Taking some air out of the crazed market — and the hot economy in general — is precisely what the Federal Reserve wanted to do when it raised its key interest rate in March and signaled more increases to come. Mortgage rates have surged in response, jumping to 5 percent from slightly more than 3 percent since the start of the year.

That rise means the monthly payment on a $500,000 house like the one Mr. Solis just sold would be about $500 more a month than it was at the end of last year, assuming a fixed-rate mortgage and 20 percent down payment. And the higher cost comes on top of a more than 30 percent rise in home prices over the past two years, according to Zillow.

Now early data and interviews across the industry suggest that many buyers have finally been exhausted by declining affordability and cutthroat competition, causing the gravity-defying pandemic housing market to start easing up.

Open houses have thinned. Online searches for homes have dropped. Homebuilders, many of whom have accrued backlogs of eager buyers, say rising mortgage rates have forced them to go deeper into those waiting lists to sell each house. In a recent survey of builders, Zelman & Associates, a housing research firm, found that while builders were still seeing strong demand, cancellations had inched up, though still well below historically low levels. Builders have also grown increasingly concerned about rising mortgage rates and surging home prices.

“There is a lot more concern than there had been,” said Ivy Zelman, chief executive of Zelman & Associates.

By any standard that prevailed before 2020, this would be a hot real estate market. Home prices remain high, and not only is there little sign they will fall anytime soon, but many economists predict a continued rise through the year. Still, after two years of torrid demand, agents had become accustomed to fielding multiple offers for each listing and setting price records each weekend. That frenzy, brought on by pandemic migrations and the growing centrality of the home as a space where people both live and work, is now subsiding.

“We’re seeing some early indications that a growing share of home buyers, especially in expensive coastal markets, are getting priced out,” said Daryl Fairweather, chief economist at Redfin.

For buyers, however, the market will still feel plenty competitive. Even if prices aren’t rising at the pace of the past two years, homes are selling within a week of being listed and posting no significant price declines.

That rising mortgage rates have not had more of an effect shows how difficult it is to tamp down prices and bring demand into balance in an economy where a lack of supply — marked by half-empty car lots, furniture order backlogs and a paucity of homes for sale — is playing a guiding role.

In the prepandemic world of bustling offices and smoothly functioning supply chains, such a steep rise in mortgage rates, on top of years of double-digit price appreciation, would have economists predicting a severe drop in demand and maybe even falling prices. Those trends would have echoed through the broader economy, with fewer people spending on moving vans and new couches, and as existing homeowners felt on less solid financial footing and potentially curbed their own spending. Instead, economists are predicting that prices will continue to rise — by double digits in some forecasts — through the year.

“I don’t think it’s going to stop the housing market,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association.

The problem is there are so few homes for sale that even a slower market is unlikely to create enough inventory to satisfy demand anytime soon. For years the United States has suffered from a chronically undersupplied housing market. Home building plunged after the Great Recession and remained at a recessionary pace long after the economy and job market had recovered. Even today, the pace of home building remains below the heights of the mid-2000s, before the 2008 financial crisis and housing market crash.

This makes it a good time to be a seller — assuming you don’t need to buy. Christopher J. Waller, a governor at the Fed, is living this out.

“I sold my house yesterday in St. Louis to an all-cash buyer, no inspection,” Mr. Waller said in panel discussion on Monday. “But I’m trying to buy a house in D.C., and now I’m on the other side, going: ‘This is insane.’”

He noted that the sharp rise in mortgage rates over recent months should have an effect on what happens with housing.

The recent lack of new building was not for lack of interest. Members of the millennial generation, now in their late 20s to early 40s, are in their prime home buying years. Their desire to buy houses and start families has collided with scant supply, leading to an increase in prices.

Shutdowns in the early months of the pandemic slowed home building, but housing starts have been on an upswing lately. New home completions remain low, however, because the tight labor market and supply chain disruptions have homebuilders scrambling to find wood, dishwashers, garage doors — and workers.

The prices, the lack of supply, the feeling that the only way to win a bidding war is to waive contingencies and inspections: All of this has worn out buyers like Armando Villanueva, a 34-year-old accountant in Whittier, Calif. Looking to trade up from an 800-square-foot two-bedroom house to a larger home for future children, Mr. Villanueva and his wife spent the last few months of 2021 putting in offer after offer — and losing each time. They stretched their budget from $700,000 to $800,000. They removed loan contingencies in hopes of being more competitive. Through two-dozen offers, it still wasn’t enough.

Finally, as the year neared its end, they offered $825,000 on a home listed for $750,000. It went for close to $1 million.

“We realized we probably want to sit out for now and save up more cash,” he said. “So now we’re just waiting.”

They are hoping prices will cool off, but while they wait rates, rents and the cost of everything else is going up.

Increases in the Fed’s policy rate, a tool that combats rising inflation, might even temporarily do the opposite in the current housing market: If first-time buyers find that climbing mortgage rates and home prices put owning a home out of reach, they may linger in apartments or single-family rentals for longer. That will pressure the rental market, where prices are already increasing rapidly.

Apart from making it harder for people to pay their bills, higher rent could also make it harder for the Fed to drive inflation lower. Rents are used to estimate housing costs overall in the Consumer Price Index and drive about a third of the inflation measure.

“If the Fed is looking for the housing market to help it cool inflation off, that’s the wrong place to look,” said Nela Richardson, chief economist of ADP Research Institute.

Still, after two volatile years, the housing market is finally discovering there is only so much down payment home consumers can afford. Household incomes have climbed over the last year as wages increased and the country staged a rapid labor market rebound, but consumers are paying higher prices for gas, groceries and a host of other products, outweighing gains for many people. At some point, households will hit their limits, and in some cases they already have.

So far, the greatest signs of the housing market’s slowing have shown up on the West Coast, where the budgets of aspiring buyers seem to have been broken by rising interest rates. In a recent blog post, economists at Redfin said that while the market was still hot by many indications, there were some early signs of cooling that would most likely translate into slower price gains across the year as the impact of rates was felt.

In California, for instance, home tours in the last week of March dropped from a year earlier. Redfin has also seen fewer prospective buyers reaching out to agents, and a decline in search activity for homes.

“What I’m expecting is for homes just to start getting fewer offers, and sellers will have to give up some of their power,” said Ms. Fairweather, from Redfin. “It will eventually filter down to prices.”