The average mortgage rate just hit its highest level in more than 22 years, once again. As of Sept. 21, the average zero point 30-year fixed mortgage hit 7.92%, as reported by Investopedia. This is the latest recent high in a series of higher highs that has some investors concerned around a potential housing market crash.
Notably, other measures of mortgage rates, including the 30-year mortgage rate reported by the St. Louis Fed, show a similar chart. The 7.19% rate reported on Sept. 21 by the St. Louis Fed appears to include discount points, but the trend is generally the same.
Given this reality — and the fact that the average zero-point mortgage loan today is within spitting distance of the 8% level — investors have reason to be concerned. Asset prices in general are a function of interest rates. As the great Warren Buffett has been quoted, interest rates are like gravity for financial markets. For house prices, this can be even more true, given the fact that a significant amount of leverage is needed for most homebuyers to purchase their first home.
Let’s dive into whether this current interest rate phenomenon could lead to a housing market crash — and what this means for investors and homebuyers.
Is a Housing Market Crash on the Horizon?
As mentioned, interest rates matter a great deal to housing prices over a long period of time. Now, interest rates have certainly hit incredible levels in recent days. However, these rates haven’t yet translated into lower home prices. That’s partly due to the relatively short amount of time interest rates have been at these levels. Additionally, many homebuyers have locked in mortgages at or below 3% and are reluctant to move, keeping supply low.
Thus, it’s a supply-and-demand game right now. Builders have reported the worst sentiment in some time and are slowing their production of new homes. Accordingly, what’s under construction right now will likely be built, but new housing permits are slowing, suggesting smart money investors in the real estate sector don’t want to be left holding the bag.
If some shock hits the economy, unemployment rises or investors are forced to sell their portfolio of rental properties (investors made up a sky-high percentage of home purchases in recent years), the housing market could indeed crash. The question is whether we’ll get a catalyst that forces more supply on the market than there is demand. Right now, that’s hard to predict.
Mortgage rates do look like they’ll hit 8%. However, until new supply comes online, homebuyers will continue to be stretched until the market completely freezes. In either case, real estate investors are likely to be much more cautious in the months, quarters and years to come. I think that’s a safe prediction to make.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
