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For a millennial or Gen Z-er searching for their first home, the price and low availability of houses is something they’ve had to contend with for several years.
Now, with the Federal Reserve trying to put the brakes on inflation, a sudden increase in mortgage rates from the historic lows of the 2010s and early 2020s could deliver another financial hit to would-be buyers entering the housing market for the first time.
Speaking this month, Mike Ruzicka, president of the Great Milwaukee Association of Realtors, said that while the recent spike – from a low of around 2.75% earlier this year to a high of around 6% last month – may have startled would-be buyers, it’s actually a pretty normal rate, even if younger buyers are having trouble seeing it.
That’s because the last time mortgage rates topped 5% was close to 15 years ago – before the Great Recession in 2008 and before many millennial-aged buyers had even thought about owning a house, and when Gen Z-aged buyers were still in grade school or daycare.
“We knew this time was coming, but we didn’t think it would take more than 10 years to get here,” Ruzicka said. “I’m going to guess that the last 10 years of low rates was a historical anomaly and that we’re getting back to more ‘normal’ rates in the years to come.”
Home values will likely hold
While the increasing rates might be throwing buyers for a loop and further slowing the breakneck pace of 2021’s white-hot home sellers’ market, the long-term impact of higher rates should only mean a return to fewer, more judicious offers on available homes, not a marked dip in prices, Ruzicka added.
That’s mostly due to a lack of supply.
“We are at two or three offers in a week for the average house. … Some sellers are getting a little nervous, but a normal market is really a couple offers over the course of a couple months,” he said. “Despite fewer people in the market because of the interest rates, prices are just going to sit at an equilibrium point. We just don’t have enough properties for people to purchase.”
While a slowing market should not have an impact on the price of most homes – especially those in the entry-level market – there could be a slight impact to homes in the $500,000 range as well as those above $1 million.
“At the upper end of the market, we saw a slowdown before interest rates went up due to fluctuations in the stock market,” Ruzicka said, noting higher-end purchases are mostly cash offers that often see buyers selling stocks to provide the money they need.
Expect more spikes
Alex Leykin, chief executive officer of A+ Mortgage Services Inc., who has spent an entire career studying mortgage rates, agrees that the rates we’ve seen the last 14 years have been historically, almost abnormally low.
But he isn’t so sure that we can expect rates to stay at the still-comfortable levels of 5% or 6%. That’s largely due to the Federal Reserve’s efforts to slow the economy, including its decision in May to begin reducing its holdings of mortgage-backed securities, Leykin said.
“It is the continuation of the tightening cycle, which isn’t a bad thing. Now we have to see how good the markets really are now that they have to stand on their own,” he said. “We just saw mortgage rates max out at 6.4% for a highly qualified buyer. Now it’s backing down into the low to mid-5s. It is very likely we will see that go back up again. It is not a guarantee. It is just how the market functions. It will just continue as the market adjusts.”
If the Fed continues to push too far in its efforts to slow the economy, Leykin said, it could easily lead to mortgage rates climbing as high as 10%, something not seen since the early 1990s.
“Long story short, the market, being the market, will absolutely overreact,” Leykin said. “The bigger question is: What happens to housing in the interim?”