Housing Market Just Got More Bad News

Mortgage rates shot up on Thursday to their highest level this year, Freddie Mac data showed, amid economic news that inflation is decelerating at a slower pace than anticipated and employers keep hiring, developments that analysts say may lead to the Federal Reserve to keep borrowing costs higher, for longer.

The 30-year fixed rate mortgage averaged closer to 6.80 percent as of February 15, up from 6.64 percent the previous week. The uptick in the cost of a home loan comes after inflation came in hotter-than-expected for January at 3.1 percent. While this was lower than the prior month's reading, it was higher than the expected 2.9 percent. Meanwhile, the economy added more than 350,000 workers in January.

The inflation print for last month surprised investors who took the data to mean that the Fed may take a while longer to cut borrowing rates, which in turn pushed up the interest on mortgages.

"On the heels of consumer prices rising more than expected, mortgage rates increased this week," Sam Khater, Freddie Mac's chief economist, said in a statement. "The economy has been performing well so far this year and rates may stay higher for longer, potentially slowing the spring homebuying season."

The jump in rates has depressed activity in the housing market, lenders said.

"According to our data, mortgage applications to buy a home so far in 2024 are down in more than half of all states compared to a year earlier," Khater added.

On Wednesday, the Mortgage Bankers Association (MBA) showed that applications for home loans declined by more than 2 percent on the back of an elevated rate.

"Purchase applications remained subdued as elevated rates continue to add to affordability challenges along with still-low existing housing inventory. Refinance applications declined and remained depressed, with rates still higher than a year ago," Joel Kan, MBA's deputy chief economist, said.

Lenders are worried that rates, which had declined from their 8 percent, two-decade highs, in the fall will subdue activity in the spring, a typically vibrant time for the housing market.

"Mortgage rates have been volatile due to strong employment data, rising last week and leading to a 2 percent drop in applications," MBA president and CEO Bob Broeksmit said in a statement shared with Newsweek. "Increasing supply levels and lower mortgage rates would be the two main drivers of any meaningful jump in home sales this spring."

Hannah Jones, a senior economic research analyst at realtor.com, pointed out that housing costs were the biggest driver of January's inflation and is a key driver of why prices remain elevated. For policymakers, it suggests that inflation is moving slowly towards the target, meaning that they may decide to retain the tightened monetary conditions to corral prices down to the 2 percent goal.

"As a result, mortgage rates are likely to continue to hover in the high-6% range until more definitive progress has been made towards 2% inflation," Jones said in a note.

Home prices tick up amid elevated rates

Meanwhile, as mortgage rates ticked up, so too did prices. The median U.S. home-sale price increased 6.1 percent in the four weeks ending February 11 compared to the same time a year ago in what was the biggest jump since October 2022, according to Redfin.

A combination of elevated rates and expensive homes is alienating prospective buyers, said Redfin's economic research lead Chen Zhao.

"The Super Bowl is like Groundhog Day for real estate economists; we usually have a read on how the market is shaping up by the beginning of February, and the read this year is that it's looking sluggish so far, mostly because of stubbornly high mortgage rates," she said in a note.

Zhao suggested that activity may pick up later in the spring as Americans accept the new normal of high borrowing costs. She is also optimistic that prices will cool enough to spur policymakers to slash rates.

"Activity should pick up a bit in the spring, partly because it'll be selling season and partly because people are getting more and more accustomed to elevated rates," she said. "We expect mortgage rates to start declining later in the spring as inflation eases and the Fed finally starts cutting interest rates."