If you bought a house before the Federal Reserve raised interest rates in March 2022, you likely locked in a mortgage rate no one will see for quite some time. In December 2021, the average 30-year mortgage rate was a little over three percent, and now mortgage rates are hovering around seven percent. The Fed has cut the Fed Funds Rate, which is supposed to lead all interest rates to fall, but the largest, most liquid market in the world is flashing warning signs saying it’s not that simple.
The Trump trade is well-known at this point, as high-level traders have been betting on lower growth and higher inflation as a result of his tariffs that will wind up being broad-based tax increases on everyone, and his racist deportation plans that will undeniably upend the American economy in various ways that we cannot predict. The Fed has immense control over interest rates, but it does not have unilateral control over them. As the saying goes, we live in a society, after all.
And that society is filled with uncertainty over what this economy under Trump will look like. The Fed has already cut their forecast for how many times they will cut rates this year, confirming the bond market’s unease over the direction of the economy. This means that interest rates will likely remain elevated even if the Fed does cut again at their next meeting, which will continue to freeze America’s housing market.
And until interest rates fall considerably, the catch-22 helping to restrict the supply in the housing market will remain in place. If you have a three percent mortgage, why would you sell your house so you can buy another one for a similar price and get a seven percent mortgage?
While there are certainly some older folks who lived through Fed Chair Paul Volcker’s interest rate shock of the 1980s and are rolling their eyes at a seven percent interest rate and thinking this dynamic is not new or a big deal, the average sale price of a house today is seven times higher than it was in 1980. Let’s do a little math on 30-year mortgages using a mortgage calculator to demonstrate how this dynamic is worse today than it was in the 1980s.
A 17.61 percent interest rate in 1980 on the average sale price of a home ($73,600) with a ten percent down payment of $7,360 leads to a monthly mortgage payment of just under a thousand dollars. A seven percent interest rate on an average home price today ($501,100) with a ten percent down payment of $50,110 leads to a mortgage payment of three thousand dollars a month. Adjusted for inflation, the monthly mortgage payment under Volcker was about $800 more expensive than an average mortgage today, but the down payment and the average sale price of a home in 1980 was nearly half of what it costs today, adjusted for inflation. This is a pretty unprecedented situation we find ourselves in.
The median sales price of a home has been flat to down as measured from the peak of the 4th quarter of 2022, while on a year over year basis, the median sales price of a home rose last year. This is a strange dynamic that both makes it unprofitable for pre-March 2022 homeowners to sell their home after accounting for the change in interest rates, while also keeping home prices elevated by restricting the supply of homes for sale. Add in the fact that there is a rapidly deteriorating insurance crisis where insurance costs more than a mortgage in some parts of America and buying a house has become even more expensive. This is a climate change story too, as the very concept of home insurance may become a thing of the past in threatened areas like Florida.
Add all of these elements and dynamics together and you get the weakest housing market in young Millennials and Zoomers’ lifetimes, and there is no indication that it will get much better any time soon. Unless Trump’s tariffs and racist deportation regime don’t result in what all known economics tell us they will lead to, it’s likely that interest rates will remain elevated even if the Fed continues to cut. If you were looking to buy a house this year, Trump’s policies and the market’s reaction to them are the biggest roadblocks to doing that, as Rick Palacios Jr., director of research at John Burns Research & Consulting, told the Wall Street Journal that “The starting point for 2025 is, you’re kind of already starting in a spot with not that much momentum. I don’t really see how that thesis reverses and gets more optimistic as long as mortgage rates stay at 7%.”
GET SPLINTER RIGHT IN YOUR INBOX
The Truth Hurts
