Mortgage rates pose new threat to housing market, frustrating buyers

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The U.S. housing market remains mired in a rut of high prices, expensive borrowing costs, and a lack of new homebuilding that threatens to extend well into next year, challenging President-elect Donald Trump’s plans to revive the ailing sector.

Mortgage rates have been rising for the past month, testing an early July peak of 6.9% last week, according to data from the Mortgage Bankers Association. Why? Renewed inflation risks tied to Trump’s policy proposals lifted the benchmark Treasury bond yields that are used to set home borrowing costs.

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Still, the MBA reported a modest pickup in purchase applications, helped in part by the lower rates offered to first-time buyers through the Federal Housing Administration loan program.

“For-sale inventory has loosened in some markets, and some potential buyers have been able to take advantage of increasing supply and lower FHA rates, which were down slightly in comparison to the conforming 30-year fixed rate,” said the MBA’s deputy chief economist, Joel Kan.

President-elect Donald Trump has vowed to ‘eliminate regulations that drive up housing costs, with the goal of cutting the cost of a new home in half.’

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The relentless rise in mortgage rates, which have surged more than three percentage points from pre-pandemic levels, has slashed the number of buyers able to afford homes in an increasingly expensive market.

In fact, MBA data suggest that new mortgage applications, a key indicator of near-term demand, are at about half of November 2019’s levels.

The average home price, meanwhile, has risen by more than a third since November 2019, just before the pandemic, to around $425,000, further pressuring the overall cost for first-time buyers.

Trump has vowed to loosen restrictions that he says are preventing the construction of new homes. In September, he told an event at the Economic Club of New York that he would “eliminate regulations that drive up housing costs, with the goal of cutting the cost of a new home in half.”

“We’re going to open up our country to building homes inexpensively, so young people and other people can buy homes,” he added.

Trump has also claimed that his proposal for mass deportations of illegal immigrants would lower housing costs by reducing overall demand. However, many have argued that the home construction sector relies heavily on the very labor he plans to eliminate.

Housing starts are already in the doldrums, with single-family home construction falling 6.9% last month, according to the latest data from the Commerce Department.

Permits for new construction, a key demand indicator that is much less influenced by the extreme weather that hurt housing starts, edged upward, hitting the highest level since April.

“Residential construction continues to trend downward, being weighed down by high mortgage rates and a softer job market,” said Jeffery Roach, chief economist for LPL Financial in Charlotte.

“However, builders reported a recent uptick in traffic of prospective buyers, bolstering the near-term outlook for housing demand in the next six months.”

Any move higher in mortgage rates, however, could temper that demand increase very quickly unless Washington takes clear and decisive action, argues CoreLogic’s chief economist, Selma Hepp.

“High mortgage rates continue to hinder recovery; however, with homebuilder confidence gradually increasing, more newly built homes will make their way to market in 2025,” she said.

“The incoming administration could push for more housing to be built, perhaps even making federal lands available for residential construction and potentially limiting regulatory barriers that have added considerable costs to new construction,” Hepp added.

Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, argued that mortgage costs will continue to blunt homebuying demand even at current rates.

“The relatively high inventory of new homes for sale suggests that single-family construction probably will flatline at best over the coming months, and could easily start falling back again soon if mortgage rates remain around their current levels,” he said.

Realtor data show that the number of active listings last month rose to the highest level since December 2019, although the rise in mortgage rates held down the number of new listings.

Homes are also taking a lot longer to sell, with an average of 58 days on the market, the slowest October pace in five years.

The bigger impact, however, will likely come from lower mortgage rates, but markets can’t bank on that just yet.

Federal Reserve Chairman Jerome Powell told investors last week that the central bank is in “no hurry” to lower overall borrowing costs.

Stronger-than-expected readings for retail sales and Consumer Price Index inflation last month and Trump’s tax and tariff proposals suggest renewed inflation risks over the coming months.

CME Group’s FedWatch, which tracks betting on Fed rate moves, pegs the odds of a December reduction at around 59%, down from around 85% just before the election.

It also suggests fewer cuts next year, indicating a Federal Funds Rate of between 4% and 4.25% by June 2025, just a half point lower than its current level.

Lower Fed rates, however, might not spill over into the mortgage market if the new Trump administration follows through on a promise to privatize mortgage giants Fannie Mae and Freddie Mac.

The two firms, which have been operating as so-called government-sponsored enterprises since the global financial crisis in 2008, guarantee around $12 trillion in U.S. home loans under the supervision of the Federal Housing Finance Agency.

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Selling the government’s stakes into the market would generate a windfall for the Treasury and deliver on an unfinished Trump-era mission. However, it could also add to overall homebuying costs as the new private entities charge higher rates to compensate for the private capital they would need to support their balance sheets.

And even a rapid sale wouldn’t likely be completed until 2027, leaving markets focused on Fed rates and new-home supply in the near term.

“Further interest rate cuts from the Federal Reserve through 2025 should result in lower interest rates for construction and development loans, helping to lead to a stabilization for apartment construction and expansion for single-family homebuilding,” said Robert Dietz, chief economist for the National Association of Home Builders.