Mortgage rates hit 6.3%—the real cost to buy a house has officially spiked over 50% in just 6 months
Heading into the year, Fannie Mae predicted that the average 30-year fixed mortgage rate would climb from 3.1% to 3.3% by the end of 2022. The Mortgage Bankers Association was a bit more bullish for mortgage rates, predicting the average rate would rise to 4% by the end of 2022.
At the time, Ali Wolf, chief economist of Zonda, told Fortune that “the impact of rising interest rates depends on where they land. If [mortgage] rates approach 4% before the end of the year, there will be a notable downshift in housing demand…If mortgage interest rates gradually rise throughout the year, allowing home sellers to price their homes accordingly, then the shock to the system will be less noticeable.”
Fast-forward to today, and it’s clear that neither Fannie Mae’s forecast nor the Mortgage Bankers Association’s prediction was anywhere close to reality. Instead, we’ve tipped over into what Wolf deems the “shock to the system” category.
As of Tuesday, the average 30-year fixed mortgage rate has jumped to 6.28%—up from 5.3% just a month ago. That marks the highest mortgage rate since 2008. The 3.2 percentage point jump in mortgage rates over the past year also marks the biggest upward swing since 1981.
If a homebuyer took out a $400,000 mortgage in June 2021 at the then average fixed rate of 3.1%, they’d owe $1,708 per month. At a 6.28% rate, that principal and interest payment comes out to $2,471. However, that’s assuming the home didn’t change in value. Now let’s say that home jumped 20%—the latest reading for year-over-year home price growth—in value. That ups the mortgage to $480,000. At a 6.28% rate, a $480,000 mortgage comes out to a $2,965 principal and interest payment. That’s quite a jump.
Since April, Moody’s Analytics chief economist Mark Zandi has been telling Fortune this would happen. What we’ve entered into isn’t just a housing slowdown. Instead, Zandi says, it’s a full-blown “housing correction.” Over the coming 12 months, Moody’s Analytics forecasts the year-over-year rate of home price growth will plummet from 20% to 0%, while significantly “overvalued” housing markets like Boise and Atlanta could see home prices drop 5% to 10%. (Moody’s Analytics estimates 183 regional housing markets are “overvalued” by more than 25% relative to what local economic fundamentals would historically support.)