Mortgage interest rates 2018: Rates hit 7-year high, slow home sales

Is the housing market, an engine of economic growth, starting to sputter?

Home sales are slowing, spurring debate about whether the culprit is rising mortgage rates or low housing supplies.

The past week, the average 30-year fixed mortgage rate increased from 4.61% to 4.66%, the highest level since May 2011, mortgage giant Freddie Mac said Thursday. The rate is up from 3.95% at the start of the year and a recent low of 3.78% last September.

Thirty-year mortgage rates have risen in 15 of the first 21 weeks of 2018, the largest share since Freddie Mac began tracking the data in 1972. The healthy economy and prospects of higher inflation are pushing up yields on the 10-year Treasury bond to about 3%, and that rate directly affects mortgage rates.

The nearly three quarters of a percentage point increase in mortgage rates so far this year would boost the monthly payment on a $200,000 mortgage by about $85, according to Greg McBride, chief economist of Bankrate.com.

The higher costs may already be damping sales. Existing home sales fell 2.5% last month to a seasonally adjusted annual rate of 5.46 million and were 1.4% below the year ago level, the National Association of Realtors (NAR) said Thursday. From January through April, home sales are down 1% from the same period a year ago, according to NAR Chief Economist Lawrence Yun.

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Some economists largely blame low housing supplies, not rates. There was a four-month inventory of existing homes on the market in April – the time it would take to exhaust the supply at the current sales pace — compared with a balanced six-month stockpile. When units go up for sale, buyers are snapping them up. Homes typically stayed on the market 26 days in April, the shortest time frame since NAR began tracking the data in 2011.

“I think the reason home sales are not rising is just that there’s no inventory,” says Freddie Mac Chief Economist Sam Khater.

Also, the skimpy supplies are pushing up prices, another factor that could be discouraging some buyers. The median price of an existing house was $257,900 last month, up 5.3% the past year.

But amid solid job and income growth and a stronger economy, higher rates and prices won’t stop the vast majority of Millennials from buying their first homes, Khater says. Most will simply buy smaller units, he says. Alternatively, they’ll buy homes further from the urban areas where they work, says Zilllow Senior Economist Aaron Terrazas.

Yet both economists say higher rates are likely discouraging some existing homeowners who might otherwise sell their houses and buy larger ones. They may balk at forgoing their current low rates for a bigger monthly payment.

“If they don’t really need the extra space, they’re not going to move, Terrazas says. He believes home sales have been tempered by a combination of the low supplies, higher prices and mortgage rates, and wages that have risen only modestly.

But Ian Shepherdson, chief economist of Pantheon Macroeconomics, mostly attributes the tepid sales to higher mortgage rates. An index of mortgage applications for home purchases is up 3.5% from a year ago. But it’s down 6% on a seasonally adjusted basis since it peaked in December, Shepherdson says. Mortgage applications reflect home buyer demand and current rates, he says, rather than obstacles that may ultimately prevent shoppers from buying a house, such as low supplies and competition from other buyers.

“It’s wishful thinking to argue that this isn’t about rates,” he says. In recent years, he says, every half percentage point increase in rates has cut mortgage applications by about 8%.

Applications to refinance mortgages are more sensitive to rates and fell last week to the lowest level since December 2000, according to the Mortgage Bankers Association.

The effects of higher rates are likely to intensify, economists say. Khater predicts the average 30-year fixed rate will climb to about 5% by the end of the year.