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Housing Market Shifts with Sky-High Interest Rates | November 2022

Published Date
Author Geoffrey A. Hirt

Consumer prices have increased with inflation affecting airfare, rent, food, and more. To fight increasing prices, the Federal Reserve has increased interest rates. Mortgage rates have skyrocketed to a 20-year high as the Federal Reserve aggressively tries to bring down inflation. 

What is a home mortgage? 

A mortgage is a loan made so that an individual can purchase a home.  The real estate itself is pledged as a guarantee (called collateral). If the buyer cannot repay the loan, the institution that holds the mortgage can take back the property and sell it to get the loan repaid.  

What is the Federal Reserve? 

The Federal Reserve Board is the guardian of the American financial system. It is an independent agency of the federal government that regulates the nation’s banking and financial industry. The Federal Reserve tries to create a positive economic environment with low inflation, high levels of employment, a balance in international payments, and long-term economic growth. Learn more about how the Federal Reserve affects the economy. 

Why are mortgage rates so high? 

Inflation is marked by a general increase in prices over time, which can be seen broadly in the prices of goods and services across the economy. High inflation decreases the purchasing power of consumers, making their money worth less as inflation increases.  

One way the Federal Reserve tries to fight inflation is by increasing interest rates. With higher interest rates, mortgages become more costly for borrowers, businesses borrow less, business growth slows, price increases slow, spending is restrained, fewer workers are hired, and paycheck growth slows. Some factors in this chain reaction are outside of the Federal Reserve’s control, so rates are closely monitored. 

Rates on 30-year fixed-rate mortgages (the most popular type of mortgage among U.S. home buyers) have surpassed the 7 percent mark and could go even higher. As a result of sky-high mortgage rates, the housing market has cooled considerably, pulling down overall economic growth. According to the National Association of Realtors, home sales have been in decline for eight consecutive months, down 24 percent year-over-year. According to the Mortgage Bankers Association, mortgage applications are down to the lowest levels since 1997. 

Recent data indicate that the growth rate of housing prices is declining, though home prices have not slowed down enough to offset the higher mortgage rates for buyers. Many buyers are hesitant now to enter the housing market, feeling that they missed out on rock bottom rates of years past. Many sellers are hesitant to sell their homes, feeling locked in by their current low mortgage rates. 

 

In the Classroom 

This article can be used to discuss savings and loan associations (Chapter 15: Money and the Financial System). 

 

Discussion Questions 

  1. What is inflation? 

  1. Why have mortgage rates hit a 20-year high?  

  1. How have high mortgage rates affected the housing market? 

 

This article was developed with the support of Kelsey Reddick for and under the direction of O.C. Ferrell, Linda Ferrell, and Geoff Hirt. 

 

Sources 

Aarthi Swaminathan, "Mortgage Rates Surge to a 20-Year High, Leading to Steep Decline in Home Sales," Market Watch, October 20, 2022, https://www.marketwatch.com/story/mortgage-rates-surge-to-6-94-a-20-year-high-freddie-mac-says-leading-to-steep-decline-in-home-sales-11666275389 (accessed November 1, 2022). 

Dani Romero, "Housing Expert: Homeowners Are Locked in by Their Low Mortgage Rate," Yahoo! Finance, October 31, 2022, https://finance.yahoo.com/news/housing-homeowners-locked-mortgage-rate-211226231-211226914.html (accessed November 1, 2022). 

Tara Siegel Bernard, "U.S. Mortgage Rates Rise Past 7%," The New York Times, October 27, 2022, https://www.nytimes.com/2022/10/27/business/us-mortgage-rates.html (accessed November 1, 2022). 

About the Author

Geoffrey A. Hirt of DePaul University previously taught at Texas Christian University and Illinois State University, where he was chairman of the Department of Finance and Law. At DePaul, he was chairman of the Finance Department from 1987 to 1997 and held the title of Mesirow Financial Fellow. He developed the MBA program in Hong Kong and served as director of international initiatives for the College of Business, supervising overseas programs in Hong Kong, Prague, and Bahrain, and was awarded the Spirit of St. Vincent DePaul award for his contributions to the university. Dr. Hirt directed the Chartered Financial Analysts (CFA) study program for the Investment Analysts Society of Chicago from 1987 to 2003. He has been a visiting professor at the University of Urbino in Italy, where he still maintains a relationship with the economics department. He received his Ph.D. in finance from the University of Illinois at Champaign-Urbana, his MBA at Miami University of Ohio, and his BA from Ohio Wesleyan University.

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