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Mortgages

Mortgage Rates

Here's What 8% Mortgage Rates Could Mean for the Housing Market

What seemed impossible in January is now close to becoming reality: Could mortgage rates pass 8%?

That’s the question buyers, sellers and experts who follow Freddie Mac's benchmark weekly rate survey are asking as the U.S. housing market enters the final weeks of a particularly rough year. Since the beginning of 2023, mortgage rates have jumped from 6.48% to 7.63%. Rates have risen by half a percentage point in the last six weeks alone.

As a result, mortgage applications have fallen to a 28-year low, and homes are selling at the slowest pace since 2008. Buyer affordability, which was already an issue at the end of 2022, has eroded to the point where the annual income required to afford a typical home is now nearly 15% higher than a year ago.

So what’s next?

Earlier this week, some media outlets reported mortgage rates had indeed touched 8%, but data from Freddie Mac, which publishes a weekly average of rates borrowers who have excellent credit and make a 20% down payment can expect to see when applying for a home loan, came in slightly lower. (Freddie Mac is the widely used rate standard.)

There’s no way to definitively predict whether these rates will climb to, or past, 8%; there are too many factors that influence them to say for sure. But that uncertainty, according to Chen Zhao, economics research lead at brokerage Redfin, also means it’s “well within the range of possibility that rates go to 8% or more” — bad news for anyone planning on buying or selling a home.

This would not be the first time rates cross the 8% mark. It last happened in 2000, during the run-up to the housing market boom that ended in the Great Recession. But after years of mortgage rates hovering around 3%, it’s a pretty shocking number.

Why are mortgage rates so high?

The recent surge in mortgage rates results from several factors, most significantly the Federal Reserve’s policy of increasing short-term interest rates.

Hiking interest rates has long been the Fed’s primary tool for battling high inflation. Back in 1981, during what is known as the Double-Dip Recession, then-Fed Chairman Paul Volcker raised the federal funds rate to 19% as a means of reining in inflation that had rocketed up to 11%. In turn, mortgage rates reached an all-time high of 18.63% in October of that year.

In March 2022, the Fed started implementing a series of rate hikes to the federal funds rate — the rate banks charge each other for overnight loans — to control inflation and bring consumer prices back to an acceptable level. Since then, there have been 11 rate hikes, with the fed funds rate at a top range of 5.5%.

Although the fed funds rate doesn’t directly impact mortgage rates, it does influence them: The higher the fed funds rate, the higher the mortgage rate.

Compounding the effect of the Fed’s policy is the surprising strength of the U.S. economy. The goal of the rate increases was to slow the labor market down and cool consumer spending. The theory goes that with less demand, prices for goods and services would decrease.

But the jobs market has remained resilient, and consumer spending hasn’t slowed enough. Although inflation has dropped from a high of 9.1% last summer to 3.7%, it remains well above the Fed’s target range of 2% in the long run.

However, there is hope that the upward pressure on rates could start to ease. At its last meeting in September, the Fed signaled it might need to implement more rate hikes to help tame inflation. Since then, the central bank’s tone has changed. In a speech in New York on Thursday, Fed Chairman Jerome Powell hinted that “financial conditions have tightened significantly in recent months,” leaving open the possibility that rate hikes may be done for this year.

If an extended pause does occur, it could stabilize mortgage rates and allow them to settle lower. But “rates won’t drop like a rock,” says Melissa Cohn, regional vice president of William Raveis Mortgage. Instead, she says, there will likely be “bubbles” of drops until the Fed is satisfied inflation is under control, and the rate can start decreasing again.

Though most industry experts expect mortgage rates to stay in the mid-to-high 7% range for the rest of the year, they acknowledge the chance of them moving higher. The underlying concern: If 7% rates are already creating havoc in the market, what could 8% rates do?

How 8% mortgage rates could impact the housing market

The silver lining, if anything, is that an 8% mortgage rate likely wouldn’t lead to a significant disruption in the housing market. As Nicole Bachaud, senior economist at Zillow, pointed out in a recent analysis, an 8%+ mortgage rate may be “daunting” but wouldn’t significantly change the current state of affairs.

Those most affected would be potential homebuyers who would see their strained affordability worsen. For example, at current rates (around 7.5%), a homebuyer would need an income of $107,000 to afford a typical U.S. home — assuming they make a 10% down payment. If rates go up to 8%, the required income would increase to $114,000.

For comparison, according to U.S. Census data, the median household income was about $75,000 in 2022.

Hannah Jones, senior economic research analyst at Realtor.com, says buyers wouldn't be the only ones impacted. Homeowners, already feeling trapped by their ultra-low rates, could have even less motivation to put their homes up for sale, leading to even fewer new listings coming onto the market.

(Even under the 8% benchmark, the pullback from the market by both buyers and sellers “will persist and possibly intensify as rates continue to climb,” Jones says.)

With fewer buyers and sellers participating in the housing market, there are implications for inventory levels and home prices.

In an ironic twist, although the number of new listings would decline in reaction to 8% mortgage rates, those homes that do get listed would be likely to stay on the market longer, pushing the total number of homes for sale higher. As inventory increases and buyer interest remains low, sellers would need to lower their asking prices in markets where supply outpaces demand.

Regardless of whether rates move higher, they’re likely to remain elevated for a while. Anyone thinking of a home purchase over the next year needs to not only have their finances in order but also be aware of how rate changes could affect the market as a whole.

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