June 29, 2022

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Can Home Prices and Interest Rates Soar at the Same Time?

2 min read

It’s getting more expensive by the moment to buy a home in America. Mortgage interest rates, historically low during most of the pandemic, are rising faster than they have in decades.

Put the two trends together, and the prospective monthly mortgage payment for home buyers — combining principal and interest payments — is really taking off:

In February, according to the Mortgage Bankers Association, the median monthly payment on a new mortgage application in America jumped more than 8 percent in just one month. That spike points to an entirely new and unpredictable phase in what has been a jaw-dropping housing market.

In normal times, rising mortgage rates are supposed to help cool housing prices. But it’s possible for now that both measures will keep charging ahead together, making it increasingly expensive to buy a home.

“There are so many strange things going on right now,” said Edward Seiler, the associate vice president for housing economics at the Mortgage Bankers Association.

It has been 40 years since rates have risen like this alongside similar home price growth and high inflation. This time around, the United States also has a severe housing shortage. And then there’s a new and uncertain dynamic — the sudden rise of working from home, which has the potential to change what home buyers want and where they live.

“Nobody really knows what’s going to happen over the next year,” Mr. Seiler said. That makes it hard to predict when rates might start to act as a brake on rising prices.

Among a subset of mortgages backed by Freddie Mac, the monthly payment new buyers are making has risen more steeply since the start of the pandemic than at any time in the last 25 years.

“That shows you the compounding artifact of both rising rates and rising home prices,” said Sam Khater, the chief economist at Freddie Mac. “We’ve had episodes of each in the past — but not this intense for both.”

Early in the pandemic,…

Emily Badger and Quoctrung Bui

2022-04-02 11:59:50

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