People who were hoping that the steep and sudden rise in mortgage interest rates that have occurred in the last year would come to an end soon are likely to be very disappointed.
Moody’s Analytics published a new forecast recently that said that U.S. property values could decline by 2.4% in the year ahead, as the increased mortgage interest rates are having a huge negative effect on the market as a whole.
As the report pointed out:
“While maturing millennial households drive housing demand, the doubling of U.S. mortgage rates is causing notable retreats in certain markets, mainly in western states.”
The Federal Reserve has been on a warpath with interest rates over the last 15 months, approving 10 different hikes in the benchmark interest rate in that time. They’re trying to stamp down out-of-control inflation, and while some statistics show that what they’re doing is working, all of those increases have had an effect on other areas of the market.
Mortgage interest rates aren’t directly tied to the Fed’s benchmark interest rate. That being said, it does have an indirect effect on the mortgages, in addition to having a direct effect on interest rates for credit cards and car loans.
The challenge for homeowners is that even a slight increase in mortgage interest could result in a huge increase in monthly payments.
LendingTree recently conducted a study that compared the average mortgage payments people make on a monthly basis if they have a 30-year fixed-rate mortgage, using the average rate available in April of 2022 (3.79%) compared to that of April of 2023 (5.25%).
The study found that the difference of 1.46% in the interest rate resulted in homeowners having to pay possibly hundreds of dollars more every month. Plus, over the entirety of the mortgage, these borrowers could end up paying up to $75,000 more in total interest.
Keep in mind, too, that the 5.25% rate from April of this year is not really even available anymore. Freddie Mac released a report last week that showed the average 30-year fixed-rate loan had an interest rate of 6.78%. While that marked the first week-over-week decline since back in June – and was the largest drop since back in March – it’s still well above that 5.25% mark.
The Moody’s report said:
“Potential homebuyers and existing homebuyers needing to refinance or with variable payments now face materially larger monthly loan costs, against much more modest changes in their incomes.”
In other words, these extreme rises in costs aren’t being offset by an increase in wages, which is causing a major problem for many homebuyers or prospective homebuyers.
It also doesn’t appear that mortgage rates are going to be coming down significantly anytime soon, either. The Fed said it expects to raise interest rates at least two more times this year, with the first coming later this week.
That could at the very least keep mortgage rates at their current inflated levels, if not push them even higher, for the foreseeable future.
