Yahoo Finance Jay Powell just made buying a home this spring even more challenging
The Federal Reserve chairman this week doused any hope homebuyers had that mortgage rates would soften anytime soon.
Instead, rates jumped above 7% after Jerome Powell said inflation was taking longer to come down to the Fed's intended target, a sign that any rate cuts investors were betting on may not arrive soon this year — if at all.
Not only do higher rates make it more expensive for buyers to borrow to purchase a home, but they also continue to convince homeowners to delay selling theirs, keeping a lid on inventory growth and spurring price increases.
"I had thought in January that 2024 would be a year of less disappointment. Now with mortgage rates remaining elevated, it may be a path of moving sideways," said Jonathan Miller, president and CEO of real estate appraisal and consulting firm Miller Samuel Inc.
Homebuyers came into the year with some hope. Going into March, the markets were betting the Fed would cut its benchmark rate six times this year, even though the central bank only forecast three.
But after job growth repeatedly topped expectations and inflation surprisingly accelerated, those cuts look less likely. Powell drove home that point on Tuesday.
"Given the strength of the labor market and progress on inflation so far, it's appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us," Powell said at an event in Washington on the Canadian economy.
Read more: What the Fed rate decision means for loans and mortgages
That sent the 10-year Treasury yield, which mortgage rates follow, above 4.5% "with some pundits talking about getting to 5% and even debating the possibility of no rate cuts at all," Mark Fleming, chief economist at First American Financial Corp., told Yahoo Finance.
That puts a wrench in buyers' plans. Many were ready to swallow elevated rates now, with the expectation that they could refinance to a lower one when those rate cuts came to pass. That playbook is now out the door.
Even worse, higher rates will continue to hurt inventory, or "the most significant housing metric," Miller said, by discouraging sellers from selling.
More than three-quarters of homeowners with a mortgage hold a rate below 5%, according to an analysis from Redfin, while almost 60% have a rate under 4%.
"The spread between people that bought or refinanced in the pandemic era and now, it's hard rationalizing selling their home when rates are 7.5%," Miller said.
How hard? A homeowner with a rate secured in 2020 or 2021 would pay $804 more per month on a mortgage payment to simply buy the same house now, Intercontinental Exchange Inc. found.
To buy a more expensive house, the homeowner would need to shell out $1,773 more per month on average. Historically, an upgrade only cost $400 more per month.
That's a financially strong incentive to stay put.
Read more: 5 strategies to get the lowest mortgage rates in 2024
So with limited supply coming online, home prices continue to increase, another blow to buyers.
While sales of previously owned homes fell 4.3% last month, prices increased by 4.8%, according to the National Association of Realtors. In the New York City suburbs, 40% to 50% of homes sold for more than their listing price in the first quarter, Miller said.
Still, "it’s not a certainty that prices continue to push up," Fleming said. "That depends on whether the supply response to higher rates is stronger or weaker than the demand response."
What should a buyer do? For those who have the financial wherewithal to withstand higher rates, they may be in luck, said Danielle Hale, chief economist for Realtor.com.
"They may see a little bit less competition in the market right now, and that might make it easier to have an offer accepted," she said. "It does come with a price of higher costs, but if that's something they can manage, it's worth considering."
Buyers may also find that sellers are more willing to negotiate versus last year. A recent survey from Realtor.com found that fewer potential sellers expect a bidding war, a price above asking, or buyers to forgo contingencies like inspections and appraisals than in 2023.
"As mortgage rates start to tick up, we are seeing more sellers make price reductions on their homes than we typically do at this time of year," Hale said. "I think the data suggests that sellers are approaching with more moderate or realistic expectations as the higher mortgage rates go."
Janna Herron is a Senior Columnist at Yahoo Finance. Follow her on Twitter @JannaHerron.
