The repricing of risk is affecting asset classes across the U.S. and global economies as investors reassess the wisdom of lending money to both public and private borrowers.
That reassessment has resulted in rising risk premiums being attached to an array of lending products.
That includes fixed 30-year mortgages, which in one way presents the most vivid affordability challenge for the Gen-Z cohort and younger millennials looking to buy a house.
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And housing is likely to become more unaffordable. As the Federal Reserve seeks to restore price stability, it is embarking on a period of rate hikes that will in some respects require slower growth in residential investment and make it more difficult for younger and middle aged cohorts to purchase homes.
Higher long-term rates will be a fact of life for the foreseeable future. Increased monthly mortgage payments will reduce household disposable income and restrain housing turnover as existing homeowners sit on their lower-rate mortgages.
The national average mortgage rate has increased from 2.87% at the end of 2020 to 7.35% as of the first week of October. (Fannie Mae rates have been about 10 basis points lower this year.)
With the increase in rates, monthly mortgage payments have moved higher as well. In 2020, for each $100,000 of a mortgage, households were paying $400 per month. That cost has increased to $690 per month.
The national median-sized home costs around $300,000, which in 2020 after a 10% down payment required a monthly mortgage payment of principal and interest of $1,119.
At the current 7.35% mortgage rate, that figure is now $1,860 per month, an increase of $741 that cannot easily be spent elsewhere.
Note that this is payment only for principal and interest on the loan and does not include insurance and local taxes.
While the cost of a mortgage has increased since 2020, a good portion of that jump has occurred since early this year.
Since February, the cost of a monthly mortgage payment has increased $368 per month on a $500,000 home with a 10% down payment.
That monthly increase comes to $4,416 per year because of a 126 basis-point increase in the prevailing 30-year fixed-rate mortgage.
The takeaway
The housing market is in some respects collateral damage caused by pandemic-era shocks, the attempt to reshape global trade imbalances by Washington as well as the wars in Ukraine and the Mideast.
In addition, because of rising long-term interest rates amid expansionary fiscal policies that have resulted in a deficit at or near 6% of gross domestic product, private investment is being crowded out by other priorities. The result is an affordability index for first-time buyers that has reached a multidecade low.
As interest rates have increased, monthly mortgage payments have increased accordingly. That leaves little incentive for households to move, particularly if their current home was purchased during the era of near-zero interest rates after the 2008 financial crisis.
