According to Zillow Research, mortgage rates have climbed considerably since spring, moving from around 6% to the upper end of the typical two to seven percent range we've been seeing over the past couple of years. If you're a buyer who didn't close on a home during the busier months, the numbers are working against you right now.
What's driving these rate increases? Zillow points to a couple of converging factors. Oil prices have ticked up due to geopolitical tensions, and the employment picture came in stronger than expected in August, with the country adding significantly more jobs than forecasters had anticipated. The prior month's job losses were also revised upward. This stronger labor market makes it harder for the Federal Reserve to justify holding rates steady, since inflation remains a concern they're watching closely.
Here's what that means in real dollars. The monthly mortgage payment on a typical home has increased by about 2% compared to a year ago. Now, the good news is that incomes have been rising faster than home values, which has kept overall housing affordability relatively stable compared to last year. However, that improvement is being squeezed from another angle. Inflation in the broader cost of living is eating into household budgets faster than wages are growing, so families have less cushion to work with.
Looking ahead, Zillow has adjusted their forecast for the end of next year to expect rates around 6.7%. Since rates closed out this year in the low-6% range, buyers should expect that sales activity will face headwinds going forward.
What I am seeing locally here in the Bay Area is that this timing squeeze is real for buyers. Those who waited thinking rates might drop are now facing higher monthly costs on an already expensive market, and that's a tough spot to be in when your discretionary income isn't growing as quickly as your total cost of living.
