Key Details
  • Mortgage rates are currently hovering around 7%, but NAR chief economist Lawrence Yun says we could see rates rise to 8.5%.
  • With today’s rates, buyers need to lower their price points to avoid becoming financially burdened.

Mortgage rates hovered just south of 7% last week, with the 30-year fixed rate at 6.94%. Economists with NAR and Bright MLS speculate if this could be our new normal. 

But if the Federal Reserve keeps raising the federal funds rate, NAR’s chief economist, Lawrence Yun, suggests we could see mortgage rates jumping to a new threshold of 8.5%. 

Considering the impact higher rates have on buyers and sellers alike—and the Fed’s resolve to bring inflation under control, whatever its consequences for the housing market—his warning is timely, even if it’s not what people want to hear. 

Here’s what you need to know. 

Homebuyers shopping at lower price points

Homebuyers who haven’t been priced out of the market have had to adjust their price point. A year ago, homebuyers budgeting for a monthly mortgage payment of $1,500 could afford a $380,000 home. 

Today, with mortgage rates more than twice what they were last year, they’re looking at houses costing around $250,000. And the pickings are slim. 

In many areas of the country, homes in this price range don’t exist. First-time home buyers may be hit particularly hard because they don’t have equity to roll into a new home purchase.

Lisa Sturtevant

Chief Economist for Bright MLS

Concern over future Federal Reserve rate hikes

With the Fed poised to continue raising the federal funds rate to curb inflation, mortgage rates across the board are likely to get worse before they improve. The higher they go, the further buyer demand will drop for homes priced at the median point and below. 

Plenty is riding on the actions of the Federal Reserve at its next two meetings. Lisa Sturtevant, Chief Economist for Bright MLS, sums up the situation:  

At the beginning of the year, it seemed very unlikely that mortgage rates would push past 6%. Now the question is how high will they go? A lot of the answer depends on how aggressive the Federal Reserve is going to go on rate hikes in its next two meetings. But the impacts of the Federal Reserve’s actions are crystal clear: The Fed will continue to raise rates in an attempt to tamp down inflation, even if it causes pain in the short term.

Lisa Sturtevant

Chief Economist for Bright MLS

Mortgage rates could rise to 8.5%

Given the impact of mortgage rates between 6.5% and 7%, it’s not hard to imagine the impact of 8.5% mortgage rates on the housing market. 

More potential buyers will find themselves priced out of the market. And more sellers, seeing the drop in buyer demand and the rise of price cuts, will sit tight—especially those with lower rates locked down for their current homes. 

With inflation outpacing the growth of wages, the typical U.S. family spends over 25% of their income on housing payments. 

Nadia Envangelou, Senior Economist and Director of Forecasting for NAR, writes the following on the association’s blog, Economist’s Outlook

Including other expenses, such as mortgage insurance, home insurance, taxes and expenses for property maintenance, home buying costs exceed 30% of a typical family’s income.

Nadia Evangelou

Senior Economist and Director of Forecasting for NAR

Housing costs that take 30% or more of a household’s income are considered burdensome and associated with a much higher risk of homelessness. 

While mortgage rates at around 7% were typical of the mid- to late-1990s early 2000s, homebuyers then didn’t have to also contend with today’s high inflation rates and higher home prices. 

Freddie Mac’s averages for the week ending October 20

Freddie Mac reported the national averages for the week ending October 20:

  • 30-year fixed-rate mortgages averaged 6.94%, up from last week’s average of 6.92%. Last year, the average for a 30-year mortgage was 3.09%
  • 15-year fixed-rate mortgages averaged 6.23%, up from last week’s average of 6.09%. A year ago, the average for this type of mortgage was 2.33%
  • 5-year hybrid adjustable-rate mortgages (ARMs) averaged 5.71%, down from last week’s average of 5.81%. A year ago, the average for a 5-year hybrid ARM was 2.54%

There are always ways to educate your clients about how to get the best rate possible. First-time home buyers can look into FHA loans, which typically come with a lower interest rate and a smaller down payment. Veterans can also save money with VA loans

Top takeaways for real estate agents

Help your clients explore all their options in the current market: 

  • Apply for an adjustable-rate mortgage rather than a fixed
  • Consider affordable homes with benefits your buyers want
  • Encourage buyers to ask for concessions and other incentives

Aside from providing your clients with all the data and information they need to make the best decision, help them to see the opportunities presented by the current market. 

In the short term, with alarming headlines and higher prices everywhere, news of rising rates will no doubt sound bleak and even distressing. Don’t downplay the reality of what’s happening, but help your clients and community see it more clearly. 

Confusion paralyzes people. The more you can clear the fog, the more likely your clients will make decisions that will benefit them long-term. Be part of that, and they’ll remember you, too.