During a segment of Wharton Business Daily's Real Estate special, Wharton Real Estate Professor Ben Keys explains the impact of high mortgage rates on the housing market.

For the first time in a long time, mortgage interest rates rose above 5% last week. Rates haven't been this high since 2011. When rates jump from 3.5% to 5% in a year, people pay attention to that. 

Many homeowners will be encouraged to stay put and will be "locked-in" to their mortgage because they have such a low-interest rate. Most homebuyers purchased when rates were as low as 3% or less. They therefore will not want to move and pay a higher interest rate on a new home loan.

For new home buyers, there are affordability issues with the new/higher interest rates. Prospective home buyers, particularly first-time buyers, may now face substantially larger monthly payments for the same-sized house.

Despite higher interest rates, home buyers are not deterred. Rental rates keep rising, so renters want to buy homes and lock in their housing payments. Millennials are at the age where they are earning more and are ready to buy homes, so they are putting higher demands on the real estate market. The real estate market is undersupplied as demand rises. It is strange for interest rates to be rising and for home prices to be rising, but the lack of housing supply is the root cause of that predicament.

The refinance market is now over with rates where they are now. It will be interesting to see if lenders will shift to other affordable products, particularly in the midst of a period of rising prices. There is no financial incentive for homeowners to refinance the whole balance of their outstanding mortgage at a higher rate of interest. Households will now turn to home equity lines of credit to access some of the equity in their homes.  Considering how much home prices have risen in recent years, there is a lot of equity out there. We'll definitely see a spike in demand for closed-end 2nd liens and home equity lines of credit.

Because we have a highly uncertain economy, there is a great deal of uncertainty about where rates will go in the following year. There are numerous causes for this, including the attack on Ukraine, various supply chain concerns, and COVID. There is also the question of how the Fed will deal with inflation. The Fed has two levers in the mortgage market, both of which have an impact on short-term rates. Some economists see the Fed trying to fix inflation with multiple rate hikes over the next few years until they see that those rate hikes will not fix inflation.

The Fed will unwind their bond-buying position fairly rapidly, because they see the market as sufficiently recovered and hot, which is another element contributing to current mortgage rates rising. It's usually difficult to pinpoint exactly why rates fluctuate from one day to the next, but it appears that it was largely in response to the Fed's signal, that they will not be purchasing mortgage-backed securities at the same phase or a potential unwinding of the negative position in the future months. This could contribute to the spring selling season being slower than usual. We could see a recession as inflation and mortgage rates keep rising. That will probably slow the real estate market down a bit, but the demand for housing will remain strong. Hopefully, this will help explain what is happening in this strange real estate market today. 

If you don't use real estate as a hedge against inflation in a home purchase, consider a multi-family purchase with a group of investors. Ask Nathan Walldorf how you can do that at 423-544-7700.