Housing market: Why did mortgage rates rise again in May 2023? When will they stop?

Prices across the US economy continue to rise, but the pace of growth has slowed significantly since summer 2022. The housing sector has become a major driver of inflation, even as the Federal Reserve has pushed up interest rates and made taking out a mortgage more expensive.

Mortgage rates begin ticking up once again

On 1 June, the Fed reported that the average rate applied to a 15-year-and-30-year mortgage rose to 6.18 and 6.79 percent, respectively, from 5.76 and 6.39 percent a month earlier. This rise is attributable to the Federal Reserve’s move to increase rates by twenty-five basis points in early May. As the Federal Funds rate increased, it brought with it higher mortgage rates. This trend will continue if the Fed plans to continue hiking rates. The momentary fall in mortgage rates looks to be a result of a slowdown in the pace of the Fed’s rate increases.

The Federal Reserve’s Beige Book compiles the economic outlook of the various ‘districts’ that make up the US central bank and points out the conflicts the bank is facing as housing prices remain high.

A look at what is happening in New England

The Federal Reserve Bank of Boston reported that while the number of houses sold in March and April increased, they are much lower than they were a year ago. For the Fed, fewer houses are being sold in the First District because of “low inventories,” not “weak demand,” stating that the fall in rates seen earlier this year “helped bring more buyers to the market” when the number of houses on the market was still very low.

In terms of how the issue of low inventory impacted the prices paid by homeowners, the Fed said that “house price appreciation [had] slowed on average but remained slightly positive, with the exception that home prices in Massachusetts (not including Boston) experienced modest declines from a year earlier.”

What is driving the low inventory?

Low inventory was also cited as a problem with the housing market by the Federal Reserve Banks of New York, Richmond, and San Fransisco.

There are a few factors that help to explain why housing inventory is so low in the US and how that is creating inflationary pressure in the economy. According to the United Way, sixteen million homes in the US are unoccupied, meaning that there are twenty-eight homes for each of the 538,000 people experiencing homelessness in the US. These unoccupied properties create an allusion of scarcity which drives up the price of homes that are on the market.

MetLife has reported that while until recently, institutional investors on Wall Street only owned around five percent of single-family homes, this number is projected to rise to thirty percent by 2030. Housing experts have expressed concern about the rising share of single-family homes being owned by investors in the US. These financial institutions may be motivated to keep the homes unoccupied to increase the collective value of their holdings.

Additionally, once the property has been acquired, it may be left empty, a choice that is made when housing ceases to be right and, instead, is valued more as a financial asset. Eliminating the issue of homelessness may not be as profitable as forcing half a million people to live on the streets. That fact shouldn’t bother us so much. And, if the market is capable of setting prices that allow for a perfect or near-perfect distribution of resources, housing is a major prime example of the market mechanism failing in that goal.