High rates grip US housing as mortgage costs are seen rising next year

US long-term mortgage rates are expected to remain on an upward trend next year, adding downward pressure on homebuying demand and housing prices.

In an October 16 interview with David Lin, Ron Butler, principal mortgage broker at Butler Mortgage, said US mortgage rates are likely to rise further as government bond yields climb globally.

Butler said elevated 30-year fixed rates are suppressing demand. Buyers without an urgent need to move are likely to remain on the sidelines rather than purchase a home at current borrowing costs.

Borrowers choosing adjustable-rate mortgages are assuming rates have peaked or will decline, Butler said, warning that this assumption could prove wrong.

Butler cited increasingly bearish sentiment among fixed-income executives in Canada and the US toward long-term government bond yields. He said he is hearing that central banks will continue raising rates and that bond yields will be higher next year.

Mortgage rates are unlikely to rise in a straight line, however. Butler said yields will experience declines and jumps, but the underlying trend over the next three to six months points toward higher mortgage rates.

He said adjustable-rate mortgages pose limited systemic risk because they account for a small share of the market compared with the period before the 2008 financial crisis. About 3.1 million adjustable-rate mortgages are outstanding, representing roughly 5.6% of about 55 million active mortgages. The larger concern, he said, is that rates remain higher for longer.

High borrowing costs are constraining both existing homeowners and prospective buyers. Nearly 40% of US mortgage holders still have rates around 3%, discouraging them from selling and replacing those loans with mortgages above 7%. At the same time, buyers are leaving the market because they cannot afford the higher payments, putting downward pressure on home prices.

Redfin data showed sellers outnumbering buyers by 63%, the widest gap since the post-recession housing crash, while 41 major US metropolitan areas were buyers’ markets and only five were sellers’ markets. The State Street Home Builders ETF, XHB, was down 22% from its early-June peak, falling to $95 from $115, as residential construction completions declined.

In Canada, five-year fixed mortgages, historically the market’s mainstay, now account for about 8% of newly selected mortgages. Borrowers increasingly favor three-year or two-year fixed products, while variable-rate mortgages exceed 38% of the market. Butler added that borrowers choosing 30-year amortization can reduce the repayment period and total interest through prepayments and accelerated biweekly payments.