Mortgage rate outlook: How inflation impacts housing market

The housing market is changing. Again.

After months of rising mortgage rates, which reached an average of nearly 6% in June, consumers, facing rising inflation, are less interested in buying homes.

Mortgage applications declined for the second week in a row, July 13 data from the Mortgage Bankers Association shows. Compared to the previous week, the number of applications during the week ending July 8 dropped 1.7% despite mortgage rates trending downward since late June.

Additionally, the supply of houses on the market is increasing as more sellers are putting their houses on the market, adding further disruption to the supply and demand equilibrium between buyers and sellers.

To further complicate things, June’s consumer price index showed that inflation continued to skyrocket last month, with prices jumping by 9.1%, a 40-year high, according to the U.S. Bureau of Labor Statistics.

With these changing rates, rising prices and volatile supply and demand, what should home buyers expect from the housing market in the coming months?

The bad news for buyers

The housing market is expected to get more expensive for consumers.

Mortgage rates held steady around 3% for most of 2021. Starting in January, rates began to rise, peaking in June before starting to fall again.

Now mortgage rates are slowly starting to come back down to earth, dropping for two consecutive weeks as of June 7, according to Freddie Mac. The most recent data shows 30-year fixed mortgage rates sitting at an average of 5.3%, which is still considerably high but a move in the right direction.

But experts do not anticipate the downward trend to last.

The Federal Reserve will use June’s CPI data to inform its next move, which will likely be a more aggressive rate hike in response to inflation. If rates rise, expect mortgages to go up, too, National Association of Realtors’ senior economist and director of forecasting, Nadia Evangelou, said in a press release.

“Mortgage rates will likely resume their upward trek in the following weeks,” Evangelou said. “Stay tuned.”

Aside from mortgage rates, homes are getting more expensive and consumer power is shrinking.

Home prices rose 5.5% in the 12-month period ending in June 2022, according to the Bureau of Labor Statistics and the consumer’s dollar lost value.

“Even with a pay raise, [buyers’] income is not necessarily going to be quite as high in relation to the mortgage rate as it was a few months ago,” George Ratiu, Realtor.com’s manager of economic research, told McClatchy News.

Buyers who started their home search in January or February are going to be facing a drastically different mortgage rate than they were when they first started looking, Ratiu said. This change accounts for the drop in mortgage applications, and it is not expected to stop soon.

The good news for buyers

Although inflation is driving mortgage rates up and keeping them there, home buyers should not lose all hope.

The supply of homes on the market is growing, giving buyers more choice and power within the market. Realtor.com data showed that the number of listings in June rose 18.7% from last year.

“The frenetic pace we saw last year, you know 20, 30, 40 bids on a home, is pretty much in the rear view mirror,” Ratiu said. “With improving supply, buyers can expect to see more choices on the market. They can expect to see more homes they can look at and choose from. They can also expect that the improvement in supply will mean they have more bargaining power in the next six to eight months.”

What now?

Ratiu’s biggest piece of advice for buyers: “A little patience will go a long way.”

For buyers who can hold off on purchasing a home, late fall and early winter will likely be a much better time to buy than this summer, according to Ratiu.

Record-breaking inflation aside, summer is usually the peak time for home buying every year, so prices are typically higher. Given the current circumstances, although buyers might have more choice, they will also be facing unusually high interest rates, especially in relation to their income.

Home prices will likely stay high for the next few months, too. When a seller sets the price of their home, they use historical data from recent months to determine its value. Because of trends in past months, it will take around four to six months for prices to come down, Ratiu said.

For buyers who cannot wait though, make sure your finances are in order.

“Make sure your credit score is as high as you can get it, that you have a down payment amount, that you are pre-approved, Ratiu said.