A recent surge in US mortgage rates has pushed affordability to the lowest level in nearly four decades. For house hunters, waiting for any relief is a risky gamble.

It’s been a hard lesson. Last year’s slowdown brought a brief respite from the price gains of the pandemic boom but that’s now vanished, with home values recovering the nearly $3 trillion they’d lost.

Now, one measure of borrowing costs has climbed back up to a level last seen in 2001, and the Federal Reserve has indicated it may hike rates further, raising the risk that mortgage rates may push toward 8%.

“The resilience of the economy and the consumer has confounded a lot of people,” said Melissa Cohn, regional vice president at William Raveis Mortgage. “At the beginning of this year, people were predicting that the Fed would actually be cutting rates by the end of the year, but the economy has withstood this higher-rate environment.”

Mortgage rates — at the heart of the past year’s housing slowdown — have pushed higher as the Federal Reserve raised its benchmark rate. According to minutes from its July meeting, policymakers saw “significant upside risks to inflation,” suggesting even more increases ahead and further upward pressure for mortgage rates.

The average contract rate on a 30-year fixed mortgage rose to 7.16% in the week ended Aug. 11, data from the Mortgage Bankers Association showed Wednesday. But some buyers with low credit scores and high debt-to-income ratios are getting quotes in the 8% range, according to Cohn.

Borrowers who are moving ahead on mortgages right now are forging ahead with hopes to refinance when rates fall in a year or two, Cohn said. They’re also confident that buying now will get them lower prices than they’d secure if rates ease and buyers rush into the market.

On Edge
House hunters are already battling for scarce inventory. Many homeowners have been reluctant to list their properties and give up lower mortgage rates than they could get now. Elevated prices spurred by the supply crunch are combining with higher rates to make this the least-affordable housing market since 1984, according to Optimal Blue rate-lock data from Black Knight Inc.

“This inventory issue is a really difficult one and is emerging as something akin to a structural problem,” said Mark Hamrick, senior economic analyst at Bankrate.

Tight inventory is also limiting sales for previously owned homes. Transactions for existing homes fell nearly 19% in June from a year earlier, data from the National Association of Realtors show.

The pain may not last forever. Higher rates will sideline more buyers, pressuring transactions and eventually pushing down prices, according to Andy Walden, Black Knight’s vice president of enterprise research strategy.

For now, rates are a “heavy burden,” according to Mark Zandi, chief economist at Moody’s Analytics.

“The market seems to be incredibly on edge with regard to rates,” Zandi said. “When you get to 7% plus, the market goes dark. Affordability is too far out of reach. That’s when house prices resume declining.”

This article was provided by Bloomberg News.