The housing market, which showed signs of picking up as 2024 began, has once again cooled off in recent weeks. Experts attribute this slowdown to a surge in mortgage rates, which has made elevated home prices unattainable for many consumers when combined with high borrowing costs.

The increase in mortgage rates is a result of persistently high inflation, which has postponed interest rate cuts by the Federal Reserve. Mortgage rates are closely tied to yields on 10-year treasury bonds, which in turn are influenced by the Fed’s benchmark rate.

Susan Wachter, a real estate professor at the University of Pennsylvania’s Wharton School of Business, noted that the combination of high mortgage rates and housing prices has created an affordability crisis of unprecedented scale.

According to a report from Freddie Mac, the average interest rate for a 30-year fixed mortgage has surged to 6.9%, rebounding from a downward trend seen at the end of the previous year. Concurrently, home sales have sharply declined, with mortgage-purchase applications falling by 10% in recent data from the Mortgage Bankers Association.

The root of these market dynamics can be traced back to a highly anticipated announcement made by the central bank in December, which hinted at anticipated interest rate cuts in 2024. This news sparked optimism among key market players, who anticipated the easing of inflationary pressures and subsequent declines in interest rates. However, inflation has persisted, defying expectations and remaining above the Fed’s target rate.

Consumer prices rose 3.1% in January compared to the previous year, according to a report from the Bureau of Labor Statistics, falling short of expectations for a larger cooldown. While inflation has decreased from its peak of 9% last year, it still exceeds the Fed’s target rate of 2%.

The rise in inflation is mirrored in the 10-year treasury rate, which in turn affects mortgage rates. The average 30-year fixed mortgage rate has climbed to nearly 2.5 percentage points higher than it was when the Fed began raising bond yields in March 2022.

Higher mortgage rates have stalled the housing market, particularly as home prices remain elevated. Potential buyers are hesitant to commit to higher mortgage rates that would further compound the already steep cost of homeownership.

Lu Liu, another professor at the Wharton School, noted that many prospective homebuyers are holding back from entering the market, contributing to stable or even increasing home prices. This reluctance to sell among existing homeowners has created a puzzling scenario where demand remains low but prices stay high.

In summary, the housing market’s recent slowdown can be attributed to a combination of factors including surging mortgage rates driven by inflation, persistently high home prices, and consumer reluctance to engage in transactions amidst uncertain economic conditions.