The average 30-year mortgage rate hit a 23-year high in September, closing the month at 7.31%. The current high mortgage rates are negatively affecting affordability, making it incredibly hard not to compare mortgage rates and prices to those of the past few years — because the comparison is so stark. In 2020 and 2021, 30-year mortgage rates were the lowest in history at an average of 3.11% and 2.96%, respectively. Low rates priced buyers into the market, which drastically grew demand in a market with fairly static short-term supply. Competition among buyers rose sharply, increasing prices at the fastest rate ever. The Case-Shiller 20-City Composite Home Price Index rose 41% from June 2020 to June 2022. Meanwhile, inventory plummeted, creating an even larger supply issue than the already undersupplied U.S. market. Although home prices contracted in the second half of 2022, as the Fed began hiking rates, they bounced back in the first half of 2023 and are now only 1.6% below the all-time high. Once we couple the median price with the average 30-year mortgage rate, we can see the actual monthly cost rather than just the price. Only 27% of homes were purchased with cash in August, a good portion of which were likely bought by homeowners selling their home and using the proceeds to buy another. Most buyers, however, are financing the purchase of their homes in some capacity and are, therefore, affected by the high mortgage rates. To put the change into perspective, the median home financed in August 2023 cost 15% more on a monthly basis than the median home financed in June 2022 — the all-time high price — because rates are 1.8% higher.
As you’ve likely already noticed, our current market involves an interesting dynamic of low supply and demand, but high prices and cost of financing. A lot of this has to do with (potential) seller mentality. Approximately 75% of U.S. homeowners have mortgage rates of less than 4%, according to JPMorgan, which has kept potential sellers from entering the market because they either stay in their home or keep their home as a rental property when they move. As a result, new listings remain significantly depressed. When we compare the first three quarters of 2022 and 2023 with the average from the first three quarters of 2017 to 2021, new listings are below average by about 1.5 million homes. The National Association of Realtors reported that the number of homes sold dropped 0.74% month over month and 15.3% year over year, which is less surprising considering that there are far fewer homes from which to choose. That being said, people move for all sorts of reasons, and supply has declined further than demand, which has helped prices stay high. Homebuilders are also affected by higher rates when it comes to construction loans, so homebuilder sentiment is in decline, according to the National Association of Home Builders/Wells Fargo Housing Market Index. We will likely see fewer and fewer new homes built until rates come down, negatively affecting supply.
Different regions and individual houses vary from the broad national trends, so we’ve included a Local Lowdown below to provide you with in-depth coverage for your area. In general, higher-priced regions (the West and Northeast) have been hit harder by mortgage rate hikes than less expensive markets (the South and Midwest) because of the absolute dollar cost of the rate hikes and limited ability to build new homes. As always, we will continue to monitor the housing and economic markets to best guide you in buying or selling your home.