Mortgage Rate Hikes 2023: What the Latest Increase Means for Homebuyers

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Following a short breather with a pause last month and after 10 consecutive rate hikes, the Federal Reserve instated its eleventh increase since March 2022. The decision was announced after its two-day Federal Open Market Committee (FOMC) meeting.

Fed officials, in a unanimous — and much expected — July 26 decision raised interest rates by 25 basis points, taking the benchmark borrowing costs to their highest level in more than 22 years, as CNBC reported.

“Inflation remains elevated,” the Fed declared in a statement. “The Committee will continue to assess additional information and its implications for monetary policy.”

This new hike will have several consequences for consumers, many of whom have been facing financial pressure on several fronts.

One such consequence is a likely effect on mortgage rates, as questions arise as to what this new development means for homebuyers.

Home Prices Are Rising, Purchasing Power Is Declining

The combined impact of higher rates and higher home prices has driven the cost of financing the typical listed home up more than $250 (or 12.4%) from a year ago. Further, the cost of financing that home is up more than $1,100 from June 2020, nearly doubling the cost in three years, per chief economist Danielle Hale.

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Hale said that higher mortgage rates cut into homebuyer purchasing power and have been an important brake on existing home sales, falling from a more than 6.5 million unit pace in early 2022 to the 4.2 million unit pace in recent months.

“Perhaps more importantly, higher mortgage rates change the trade-up calculation for existing homeowners and are keeping as many as one in seven out of the market because they don’t want to give up their existing low rate,” said Hale.

“As a result, I expect the number of homes for sale to decline this year, and continue to be a damper on home sales. Limited inventory is also keeping prices high even though housing affordability has deteriorated significantly in the past three years.”

Soaring Mortgage Rates Lock Would-be Sellers in, Triggering Increased Short Supply

Mortgage rates are double from where they stood a couple years ago. As of July 26, the current average 30-year fixed mortgage interest rate is 7.12%, according to The Mortgage Reports’ daily rate survey.

As Ted Rossman, senior industry analyst at, said, at the end of 2021, that figure was just 3.27%. Further, during this rate-hiking cycle, mortgage rates have eclipsed 7% a few times, something we hadn’t seen since 2002 — akin to a 33% rise in home prices.

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“And speaking of home prices, they have remained stubbornly high in large part because of low inventory. A lot of people aren’t moving because of the ‘golden handcuffs’ of a 3% or 4% mortgage rate they secured a few years ago,” said Rossman.

Rossman added that mortgage rates probably need to go below 5%, if not even lower, to stimulate a meaningful change. He noted, however, that there is also an element of “be careful what you wish for,” since a rapid drop in mortgage rates would probably only be caused by an economic downturn.

“The housing market will likely need to adjust to a ‘new normal’ of rates in the 6-7% range for a while, gradually coming down to 5-6%,” he concluded.

This analysis comes amid an already difficult market for homebuyers. Earlier this month, a Redfin report found that just 1% of the nation’s homes have changed hands this year — translating into prospective homebuyers having 28% fewer homes to choose from than they did before the pandemic upended the U.S. housing market.

When Will the Real Estate Market Turbulence Change Course?

Dottie Herman, vice chair and former CEO of Douglas Elliman, echoed the above sentiments. She said homeowners are not going to move and pay the current mortgage rate, which is around 7%, when they locked in at a much lower rate during the pandemic. Yet, Herman believed there will be some movement in 2024 as rates come down and people start to buy again.

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“Millennials in particular believe in home ownership and are just waiting for a more favorable time to buy. Since the pandemic existing home prices have gone up 40% but recent homebuilder confidence has boosted new construction 20% since last year,” said Herman.

All in all, the rise in mortgage interest rates will continue to put pressure on affordability for would-be homebuyers.

However, given the lack of housing inventory, many will either adjust their budgets, search for lower-priced homes or remain renters, said Haseeb Rahman, portfolio manager at Palisades.

“Some homebuyers will have to decide whether to buy their dream home today and absorb the higher interest rates in hope of refinancing if rates decline in the future (i.e., ‘marry the house and date the rate’) or wait out the current market environment for lower rates and, perhaps, higher prices,” added Rahman.

A Silver Lining?

According to Michele Raneri — vice president and head of U.S. research and consulting at TransUnion — while the mortgage market may continue to be slow, it remains to be seen whether cooling inflation may help motivate consumers who had been holding off due to increasing cost of living.

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“This remains an unpredictable market when it comes to mortgages,” said Raneri.

“Mortgage rates are, in fact, high, but at the same time, we have continued to see an improvement in other metrics such as unemployment, which lends to optimism. Ultimately, even as mortgage rates remain higher than we have seen in recent history, consumers may well become impatient as they wait on buying their first, or their next, home, and may re-engage with the market sooner than later.”

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