Homebuyers in the U.S. are staring down the most volatile mortgage rates in over three decades, combined with home prices up 13.1% from a year ago. 

The 30-year fixed mortgage rate reached 7.08% on Tuesday, September 27th before dropping back to 6.82% the following day. These increases come not quite a week since the Fed’s third consecutive interest rate hike—confirming a prediction made a day later by Byron Lazine in last week’s episode of The Walk Thru.

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Monday saw a jump to 6.87%, the highest since 2002 and the biggest year-over-year increase since 1981. 

Downward pressure on home prices 

According to Zillow, around 117 housing markets across the U.S. saw home prices drop between May and August. In 500+ other markets, prices either rose or remained flat. 

But in the coming months, with mortgage rates near 7% and buyers backing out of purchase agreements, more housing markets could soon join the ranks of those experiencing home price declines. 

The longer that [mortgage] rates stay elevated, our view is that housing is going to continue to feel it and have this reset mode. And the affordability resetting mechanism right now that has to happen is on [home] prices.

Rick Palacios Jr.

Head of Research at John Burns Real Estate Consulting

Unlike 2008, we’re not faced with either a glut in housing supply or a subprime crisis. So, we’re unlikely to see home prices drop as much as they did back then. 

What this means for homebuyers

As homebuyers pull back from the market—or bail from home purchasing decisions—inventory levels will rise, and home sales volumes will fall. 

That means more options for buyers who remain in the market, along with more flexibility. 

But with mortgage rates more than doubled since the beginning of the year, buyers are faced with eye-watering increases in their monthly mortgage payments. 

If that weren’t enough, the drop in rates between July and August, followed by the spike in mid-to-late September, means many buyers who made an offer on a home when rates were around 5.5% are now faced with a mortgage payment based on rates much higher. 

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The challenges homebuyers face in today’s market go beyond the dwindling affordability caused by high mortgage rates and home prices. The whiplash in mortgage rates between when homebuyers set their budget and when they make an offer is also making it extraordinarily difficult to plan ahead.

Taylor Marr

Redfin Deputy Chief Economist

The volatility will likely depend on the Fed’s continuing efforts to get inflation under control. If they succeed and inflation eases, mortgage rates should fall within 12 to 18 months. 

That’s a bit of good news for buyers and sellers both.

What can buyers do?

In the meantime, there are some things buyers can do to reduce the cost of buying a home: 

  • Consider an ARM mortgage (rather than fixed-rate) – The rate is generally lower and is fixed for a set number of years and then adjusts up or down or remains the same, depending on where interest rates when the initial rate period ends. 
  • Switch to a shorter-term mortgage (10- or 15-year) – The rate is lower, and the term is shorter, meaning less interest paid over the life of the loan. 
  • First-time homebuyer (FHA) programs can help you buy a home with a lower down payment and reduced closing costs. State and local governments also offer grants or no-interest loans to help buyers cover both the down payment and closing costs. 
  • Rent to own may be an option for buyers who can’t get approved for a mortgage or who need more time to save up for a down payment. A portion of the monthly rent goes into an escrow account, which would help cover the down payment or closing costs. 
  • Hire an agent who’s a skilled negotiator and can help negotiate an affordable sale. 

What does this mean for sellers? 

Buyers aren’t the only ones affected by rising mortgage rates. With the growing downward pressure on home prices, sellers—especially those in the fastest-cooling markets—are faced with diminishing returns on the sale of their homes. 

Higher mortgage rates have stimulated a correction in the housing market, cooling buyer demand and boosting inventory. Sellers nationwide are feeling the effects. 

To many, it no longer feels like a seller’s market. And with mortgage rates now climbing towards 7%, relief seems unlikely. 

What can you do?

As mentioned above, become a better negotiator, so you can help your clients get the best deal possible for the purchase or sale of a home. 

A master negotiator knows the terrain better than most. Stay updated with relevant news and market data, and keep looking for ways to improve as a real estate agent.