Will rising mortgage rates cool off a hot housing market?

Sales of existing homes fell 2.7 percent in March, but rising mortgage rates and tight inventory helped push the median home price to a record $375,300.


Buying a first home just keeps getting harder. The median price for an existing single family home hit a record $375,300 in March — a 15 percent jump over March 2021 — as mortgage interest rates climbed and inventory remained tight, according to data released Wednesday from the National Association of Realtors.

Existing home sales fell by 2.7 percent in March compared to the previous month, bringing the adjusted annualized rate to 5.77 million units, and sales were down 4.5 percent compared to March 2021. The news comes just one day after the Commerce Department reported that single-family housing starts fell by 1.7 percent in March, compared to February.  

Industry observers say while scarce inventory is a major factor, the extent of the slowdown — coming at a time of year when the housing market normally picks up steam — is a reflection of the rapid run-up in mortgage rates. According to Mortgage News Daily, the average rate on a 30-year fixed mortgage hit 5.35 percent Tuesday, a leap of more than 2 percentage points from a year ago, when the average was 3.2 percent, and the highest rate in more than a decade.   

Higher rates have had a rapid impact on mortgage demand: Weekly data from the Mortgage Bankers Association released Wednesday found that the number of mortgage loan applications fell 5 percent from the previous week.

“In a housing market facing affordability challenges and low inventory, higher rates are causing a pullback or delay in home purchase[s],” commented Joel Kan, associate vice president of economic and industry forecasting for the MBA, when the data was released.  

Higher rates are yet another piece of bad news for first-time homebuyers already grappling with scarce inventory and soaring prices. But those same factors may help ease the frenzy in another part of the market that has been putting a squeeze on inventories: the market for second homes. 

While millions of people relocated permanently as remote work and school became the norm in 2020, many homeowners who could afford to hold on to their first homes bought second homes. In some towns, home prices climbed so high, so fast that local residents were priced out of the housing market, and sometimes the rental market, too. 

February marked the first time in nearly two years that second home demand, as measured by mortgage rate locks, actually dipped below demand for first homes, according to online brokerage Redfin. Demand for vacation homes was still above pre-pandemic levels in March, but Redfin Chief Economist Daryl Fairweather said the one-two punch of higher mortgage interest and thousands of dollars in new fees could prompt second-home buyers to change their mind. “When it’s an optional purchase, people get more sensitive and may decide it’s better to rent or stay in a hotel,” she said.

The new fees are being imposed on second-home buyers by the Federal Housing Finance Agency. Beginning April 1, the agency raised upfront fees on second-home mortgages to between 1.125 percent and 4.125 percent, depending on how much of the home’s value the owner is financing. 

Previously, only second-home buyers with very small down payments were assessed this fee, which topped out at a modest 0.25 percent

While not the agency’s only goal, the FHFA indicated that helping to level the playing field and foster primary homeownership, particularly among lower-income and first-time homebuyers, was one factor driving the higher fees.

The fees are also meant to weed out buyers who may run a higher risk of defaulting on loans held by Fannie Mae and Freddie Mac, which together account for close to 60 percent of outstanding mortgages in the U.S. 

“We know that second homes are riskier. They do not perform as well, with all of the factors being the same, as your primary residence,” said David M. Dworkin, president and CEO of the nonprofit National Housing Conference. 

Real estate industry trade groups had decried the higher fees, which the National Association of Home Builders said could cost a typical buyer an additional $4,875, saying they would dampen demand. 

That would be welcomed by residents in many small towns that were overrun in the early months of the pandemic by newcomers looking to relocate or buy a second home in a place with access to good Wi-Fi, space to socially distance and somewhere for the kids to run around. 

“In those markets, I do think second homeownership is making it harder for households that are trying to live there as a primary residence to compete,” said Kelly Mangold, principal at RCLCO Real Estate Consulting. 

Dominique Jenkins knows something about those markets. Jenkins is a real estate agent with Krumpfer Real Estate and sells homes in the Catskill Mountains of New York and Pennsylvania. She said in many of the towns where she does business, high-speed broadband arrived just a little earlier than the pandemic, and it didn’t take long before homes were being bid up to $100,000 over the asking price, catching longtime residents of the region’s small villages and hamlets by surprise. 

Jenkins said home-sharing platforms like Airbnb also made it more lucrative for homeowners to offer short-term rentals to out-of-towners, rather than long-term leases for local residents, which just made the housing situation worse. 

“The locals are absolutely … at a serious disadvantage. Locals have been completely priced out of their own market. It’s very bad,” she said.

In some markets, though, the flood of second-home purchases seems already to be ebbing. 

Steve Daria, a real estate broker at Maxim in Bonita Springs, Florida, said he lost one sale of a second home as a result of the higher costs the buyers would have incurred from the FHFA fees.

“They were going to get financing for a second home, and it turned them off with how much money they’d have to pay out of pocket to get the property,” he said, adding that he thinks more people are going to think twice about buying a second home — and that was before mortgage rates topped 5 percent for a 30-year fixed-rate loan. 

“I think it’s going to price people out of the market,” he said. “The purchasing power is just going to decline.”