Soaring mortgage interest rates are continuing to kick the battered and bruised housing market when it’s already down.

Higher rates are dashing the American dream of homeownership for many buyers, causing sellers to pull their homes off the market and home sales to fall. Mortgage rates surged to their highest levels in 20 years, hitting an average of 6.92% in the week ending Oct. 13 for 30-year fixed-rate loans, according to Freddie Mac. Rates more than doubled from October of last year.

In a blow to homebuyers, rates have the potential to keep notching up. Mortgage rates have been going up largely in response to the U.S. Federal Reserve raising its own short-term interest rates to get inflation under control. The Fed is expected to continue aggressively hiking its rates, especially after September’s Consumer Price Index report showed that inflation had risen 8.2% year over year in September.

Mortgage rates typically follow the trajectory of the Fed’s rates.

“It’s immediate pandemonium,” says mortgage lender Shmuel Shayowitz, of Approved Funding in River Edge, NJ. “It’s a sticker shock for people because they’re going to see rates climb.”

At today’s rates and home prices, buyers who purchase a home are paying about 80% more for the same house than if they had bought at the same time last year. (The calculation uses median list prices in September 2021 versus September 2022 using the most recent Realtor.com® data and mortgage rates from Freddie Mac. It assumes buyers are putting 20% down.)

And the higher rates go, the more Americans will be priced out of homeownership. This could be because they can no longer qualify for mortgages or they can’t make the math work on the higher housing payments.

“People who’ve been looking diligently over the last six months are frustrated because they’ve experienced in real time the shock,” says Shayowitz. “Anybody who really doesn’t need to buy or isn’t in a rental squeeze where their rent continues to rise, they’ve pulled back [from purchasing homes].”

Compounding the problem for buyers is that rates have been incredibly volatile, moving up and down sharply—sometimes in a single day.

“Even if you speak to a lender in the morning, those prices may be outdated by the afternoon,” says Shayowitz.

How the housing market is responding to higher mortgage rates

The rapidly correcting housing market has already led to buyers dropping out of the market like flies, fewer home sales, and homes sitting for sale longer. Bidding wars and high offers over asking prices have died down.

Many homeowners, most of whom are locked into mortgages with significantly lower rates, will likely be reluctant to put their homes on the market and purchase new ones. If they need mortgages to trade up or down into larger or smaller homes, their payments could be significantly higher if they purchase today.

“It seems inevitable that the higher mortgage rates have to crimp sales over time,” says Laurie Goodman, a fellow at the Housing Finance Policy Center at the Urban Institute, a think tank. “Sales are going to be low, not because people love their house, but because they love their mortgage.”

Home prices are beginning to come down from record highs over the summer, at least in some markets. Sellers have been forced to cut prices and negotiate them down further as fewer buyers can afford these pricier properties with these higher rates. However, prices overall are still significantly higher than they were a year earlier.

Are mortgage rates guaranteed to rise?

There is no guarantee that mortgage rates will continue shooting up.

The Fed’s interest rate hikes are only one component of the factors determining mortgage rates. Investor activity in the bond market also helps to decide the direction in which mortgage rates move. When the stock market is volatile, investors usually head to less risky U.S. Treasury and mortgage bonds. When demand for bonds rises, so do prices. And that leads mortgage rates to fall.

“We think the worst is behind us in terms of mortgage rates,” says Shayowitz. He expects to see swings in rates over the next few weeks before they “start calming down in late October.”

In addition, there is a very large spread between the Fed’s short-term rates and mortgage rates. Usually, they’re closely aligned. The difference is important because it provides some wiggle room for mortgage rates. They could fall a little, stabilize, or rise at much lower levels than they’ve done over the past few months in response to the Fed’s actions, says Goodman.

“It’s very possible that [the Fed’s rates] rates continue to rise while mortgage rates do not,” she says.

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