If you’ve been in the market to buy a home, you probably know that mortgage rates are much more expensive now than they were last year. In fact, over the past three and a half months, mortgage rates have risen at a faster rate than expected by industry experts.
Last year, the average 30-year mortgage was below 4% from January to December. However, the average loan over 30 years is already above 5%. And with additional rate hikes planned by the Federal Reserve, we can expect mortgage rates to climb even higher.
In fact, according to recent developments, it would not be out of the question to see the average mortgage rate over 30 years reach 6% before the end of the year. When we combine that with the exorbitant prices sellers are charging today, it’s easy to see why buyers might struggle to buy homes.
But now mortgage industry experts are predicting a major downturn in home lending. And if that happens, it could actually be good news for those hoping to attempt to buy a home.
Mortgage volume could fall
The Mortgage Bankers Association expects the total number of mortgages for 2022 to be 35.5% lower than it was in 2021. This total includes both mortgage purchases and refinances.
Obviously, the reason for the decline in demand for mortgages stems from rising borrowing rates. But while rising rates aren’t good news for buyers, falling mortgage volumes are, as they indicate that overall demand for homes is waning.
One of the main reasons sellers are getting away with such high home prices these days is that residential real estate inventory is sorely lacking. Since there are not enough houses to meet demand, sellers may raise their prices.
But if buyer demand begins to decline due to higher borrowing costs, sellers may have to start lowering the price of their homes. And once home prices begin to fall, more buyers may have the opportunity to purchase their own homes.
A real estate crash is unlikely
To be clear, rising mortgage rates and falling mortgage volumes are not likely to cause a full-fledged housing market crash, so sellers shouldn’t worry about that. But should we expect a gradual decline in house prices? It would certainly not be unreasonable.
Certainly, as house prices begin to decline, mortgage rates may continue to climb, putting buyers in a steady state. So the hope is that prices will fall to a greater degree than the rise in borrowing rates, so that buyers will ultimately benefit.
In March, the national median listing price for homes rose to $405,000, according to Realtor.com. That’s a 13.5% increase over the previous year and a whopping 26.5% increase over March 2020.
Even without rising mortgage rates, it’s easy to argue that today’s home prices simply aren’t sustainable. But a drop in demand could drive home prices down at a time when buyers really need them.
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