10% Mortgages Soon and New Home Sales Crashing

  • December 20, 2023
  • 2 min read

The real estate market has heavily relied on new construction in recent times. With existing home inventory scarce due to reluctance to sell at lower mortgage rates, the market has primarily thrived on new home sales. However, cracks in this trend are showing, evident in the 8.7 percent fall in new home sales in August.

Predicted Mortgage Rate Surge
Interest rates, currently nearing eight percent, are anticipated to soar even higher, possibly hitting double digits by 2025 or even earlier. This projected increase, contrary to the perceived high rates today, aligns with historical averages from past decades, where rates often hovered around seven to eight percent.

Federal Reserve Influence
The Federal Reserve’s stance on the ‘natural rate’ for interest rates—between 5.5 and 6 percent—will significantly impact mortgage rates. As inflation continues to rise, the Federal Reserve will likely raise its rates, compelling mortgage companies to increase their rates further to sustain profits.

Impact on Mortgage Rates
Considering the Federal Reserve’s rate hovers around six percent and mortgage companies need a significant markup for profitability, mortgage rates could reach as high as 10 percent. This steep increase could mirror the market scenario of the 1980s, when rates were in the double digits.

Housing Market Ramifications
Escalating mortgage rates could adversely affect the housing market. Fewer individuals would be inclined to sell their homes, resulting in a decreased pool of buyers for new homes. This trend could exacerbate the challenges in the real estate sales industry.

Unforeseen Trends
Despite rising rates, new home purchases experienced a modest increase of about two percent. Surprisingly, even with high rates, refinances surged in the second quarter of 2023, indicating that people are resorting to refinancing to access cash despite the increased interest costs.

Troubling Signs
The upsurge in refinances at higher rates suggests a concerning trend: individuals are resorting to cashing out of their homes, possibly due to financial strain. This development highlights a need for cash despite the higher interest rates, signifying potential financial challenges for homeowners.

What are your thoughts on these emerging trends? Feel free to share your opinions in the comments section.

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