The housing market is heating up, but this twist could send it back into the freeze

An increase in mortgage interest rates last year brought the real estate market to an abrupt halt, as dozens of would-be buyers could no longer afford to purchase homes. But last month, as mortgage rates fell and home prices fell from record highs, homebuyers entered the market again.
Real estate agents across the country reported that buyers returned to open houses, the number of mortgage applications increased, and the most desirable homes received multiple offers again.
"What we are seeing are the seeds of a potential spring thaw," says Realtor.com® Senior Economist George Ratio. But he warns that it is too early to tell if the market will recover this year.
"Just because we've had a few weeks of positive news doesn't mean the market is still roaring back," he continues. "We're still in the middle of a winter freeze."
The market usually picks up after the holidays and then takes off in the spring. But amid the busy season, the rise in mortgage rates could bring the market back to a standstill. Large swings in rates often unnerve potential buyers, and increases wipe out any savings they might have found just a week ago – a most frustrating experience for buyers.
Interest rates fell from more than 7% late last year to just under 6% in early February, according to Mortgage News Daily. But recently, they climbed back up to 6.43% by Wednesday for 30-year fixed-rate loans. This change adds about $100 a month to the typical mortgage payment—and nearly $35,000 over the life of a 30-year fixed-rate loan. (The calculation assumes the buyer puts a 20% down payment on a $400,000 home.)
"February is going to be interesting to see what happens because of the mortgage interest rate movement," says Devin Bachman, senior vice president of research at John Burns Real Estate Consulting. "Consumers like when rates don't change. This encourages people to continue purchasing housing."
The real test will begin in March. Those looking for a new home usually start or intensify their search during the warmer months, which are prime time for real estate. Prices typically rise as buyers try to outbid each other on the larger homes surrounded by blooming flowers that come up for sale.
Until last week, signs pointed to a rebound. Mortgage applications surged in the week ended Feb. 3, according to the Mortgage Bankers Association. They are up 45.6% from four weeks ago. (However, they are still down from year-ago highs.)
Builders also experienced a boost. The average sales rate for homes in new communities jumped 53% from December to January, according to data from John Burns. Typically, the rate of sales only increases by about 24% during that period.
Buyers felt good that mortgage rates dropped by a full percentage point, home prices fell in some parts of the country, and the recession that many feared would erupt has not materialized, at least not yet, Ratio says. These small changes in rates and prices, plus the lowest unemployment since 1969, pushed many buyers back into the market.
The Washington, D.C. metro started to pick up again in mid-to-late January as mortgage rates began to decline, says local real estate agent Courtney Abrams.
"We're going back to pre-pandemic routine," says Abrams, vice president at TTR Sotheby's International Realty. "We see a number of proposals in the suburbs and neighborhoods with good schools."
One of her clients won a bidding war on a townhouse in Chevy Chase, MD, against two other potential buyers. They managed to secure the house without going over the asking price - a big change from the last few years when she saw offers hundreds of thousands of dollars more than the list price.
"It's not the madness we saw during COVID, of course," she says. "Now people are getting used to higher rates and learning what they can afford. "

The lack of houses for sale is holding back the housing market

Even as open houses across the country begin to fill up again, buyers are encountering a shortage of properties for sale. They just can't buy something that doesn't exist.
The lack of housing stock is holding the market back from the start of the recovery and keeping housing prices high.
A large part of the problem lies with homeowners who will typically trade up to a larger home or downsize to a smaller home. Right now, those who can't buy with cash generally don't want to sell unless they have to. Most would rather hold on to the ultra-low rates they locked in during the COVID-19 pandemic than get a new mortgage with a higher rate.
"Their desire to sell and lose the mortgage rate they will likely never see again is diminishing," says Matthew Gardner. He is the chief economist of Seattle-based brokerage Windermere Real Estate, which operates in 10 western states. So buyers "facing limited inventory will find it more competitive than they would like."
However, if rates fall below 5%, a psychological watermark for many buyers, more homeowners are likely to put their homes up for sale.
Lower rates also increase buyers' purchasing power. For every percentage point drop, buyers can afford to borrow 10% more.
"When mortgage rates go down, as most economists believe will happen this year, that will take some buyers out of the picture," says Gardner.
However, even with the provision for rates, they are still significantly higher than they were a year ago when rates were in the 3% range. Apartment prices, although slightly down from their peaks, remained stubbornly high. Now the bidding wars are back, causing prices to rise even more.
"It's a big affordability challenge," says Len Kiefer, deputy chief economist at Freddie Mac. “This probably means that the market will remain quite slow in 2023. It will really depend on where the [mortgage] interest rates are."

Why are mortgage rates climbing again?

One of the main drivers for raising mortgage interest rates was the US Federal Reserve. The Fed raised its interest rates to slow the economy in its fight to lower inflation. (While mortgage rates are not the same as the Fed rate, they have been following the same path recently.) And investors now believe the Fed will raise its rates for longer than expected due to the better-than-expected unemployment report. shows that the economy remains strong.
"It wouldn't surprise me if we see a rise in mortgage rates," says Douglas Duncan, Fannie Mae's chief economist. "The Fed was clear that they wanted to see the slowdown in the housing market."
On the bright side, if the Fed does achieve a "soft landing" in the economy, where inflation falls without causing widespread financial pain and job losses, it could end up giving a boost to the very housing market it has been trying to cool.
"If the economy avoids a severe recession, which currently seems more likely, then home sales may be better than we would expect," says Ratio.