Why does a house that costs the same as last year suddenly demand hundreds of dollars more a month? In September, the median U.S. existing home price reached $417,500, an all-time high for that month in data going back to 1999, according to the National Association of Realtors on Tuesday, as reported by The Associated Press and Fortune. The honest answer: the price barely moved, but the mortgage rate attached to it did.
What Pushed Mortgage Rates to 7.4%
Existing home sales rose 1.5% in September from August to a seasonally adjusted annual rate of 3.99 million units, NAR said, slightly above the 3.98 million pace economists polled by FactSet expected. But compared with a year earlier, sales fell 2.2%, and the pace has stayed below the 4-million mark for two straight months, far under the historical norm of about 5.2 million, per NAR. The reported cause is borrowing costs: the average rate on the benchmark 30-year mortgage hit 7.4% last week, its highest level in nearly three years, up from below 6% before the war between the U.S. and Iran started in late February, according to AP.
From Oil Prices to Your Mortgage Bill
The AP report traces a specific chain. The war pushed up oil prices, which raised expectations of higher inflation. Those expectations pushed up long-term bond yields, the benchmark lenders use to price home loans. As yields rose, so did mortgage rates, climbing from under 6% to the current 7.4%. Meanwhile, the median sales price still rose 1.3% from a year earlier to $417,500, NAR said, marking 39 consecutive months of annual price increases. Higher rates have not cooled prices; they have mainly priced out buyers who need financing, according to NAR chief economist Lawrence Yun, who called it ‘a very tough market out there.’
Our Math: 6% Versus 7.4% on a Median-Priced Home
Take the NAR’s reported median price of $417,500 for September and assume a 20% down payment, leaving a $334,000 loan on a standard 30-year fixed term, as an illustration. At a 6% rate, the roughly pre-war level AP cites, the monthly principal-and-interest payment works out to about $2,003. At the current 7.4% average rate AP reports, the same loan costs about $2,313 a month. That is a difference of roughly $310 a month, or about $3,720 a year, from the rate move alone, before any change in the home price itself.
This Week’s Check: Is Your Rate Fixed or Still Floating?
If you are shopping for a loan or renewing one, check whether any current quote is fixed for the full term or adjustable, since AP reports the 30-year average has swung from under 6% to 7.4% within months. Compare at least two lenders’ current rate sheets before committing. Watch for NAR’s next existing-home-sales report and for any further moves in oil prices, which AP links directly to the bond yields lenders use to set mortgage rates. Source: National Association of Realtors, as reported by The Associated Press and Fortune. Disclaimer: This analysis is for educational and informational purposes only and should not be construed as financial or investment advice.
