High Mortgage Rates and a Stuck Housing Market

Mortgage rates have jumped quickly, with the 10-year Treasury above 5.3% and the 30-year mortgage around 7.5%, roughly 150 basis points higher since early February. The guest said Treasury yields remain the main driver, with inflation expectations and geopolitical concerns pushing rates up. He also noted a convexity feedback loop: as rates rise, homeowners are less likely to move, mortgage durations extend, and investors may sell duration, which can pressure yields higher, though he said that effect is not a huge force at today’s rate level.

The affordability hit is substantial for new buyers. The guest said a 7.5% mortgage rate lifts the monthly payment on a median-priced home by more than $325 versus February lows, or about 17% in seven months. But because over 90% of U.S. mortgages are fixed rate and the average homeowner rate is just under 4.5%, existing borrowers are largely insulated. The result is more pressure on the marginal buyer than on current owners.

That strain is showing up in activity data. Pending home sales have been down 3% to 5% year over year over the past two months, and purchase applications were down about 10% year over year in September. The guest said the market is likely stuck in a very low-turnover, rangebound environment, with existing-home sales at the lowest share of housing market activity in 40 years. Home prices have not rolled over meaningfully; instead, growth has slowed from about 7% to 8% a few months ago to 1.9%, and the guest expects roughly 2% appreciation through year-end.

One possible offset is a modest pickup in adjustable-rate mortgages. ARM issuance rose from a little over 15% of originations in the first half of last year to a little over 16% this year. The guest argued that this can help affordability on the margin, and that the growth is concentrated in 51, 71, and 101 ARMs, which historically have performed much like fixed-rate loans, unlike shorter-reset affordability products.