Mortgage rates unlikely to return to 3% in our lifetimes, Fannie Mae's chief economist warns

Fannie Mae's chief economist thinks that borrowers are "spoiled" and 7% mortgages are normal
By Connor Sephton
•
17 June 2024
Share:
Fixed vs. variable mortgage

Homeowners have lost touch with reality due to artificially low mortgage rates during the pandemic, warned Fannie Mae's chief economist.

According to Doug Duncan, the 3% 30-year mortgage rates during Covid were an "anomaly" that "spoiled" borrowers. He argues that the current rate of 7% is much more normal by historical standards.

"Unless there’s some catastrophic economic event for the broader economy, we wouldn’t expect to see mortgage rates back at 3% in our lifetimes," he told MarketWatch.

A gradual reduction in 30-year rates is expected as the year progresses, with the Fed tipped to eventually slash the base rate once inflation readings improve.

It can be tempting to argue that, even at 7%, things are much better than in the early 1980s, when rates breached 18%. However, that doesn't tell the whole story.

Across the pond in London, a British economics journalist dispelled the illusion that the current climate of elevated interest isn't as painful as it was in the past decade.

Back in 2022, Ed Conway argued that consumers were in a better position to stomach double-digit rates because they had a higher level of disposable income against repayments.

With property prices substantially higher today, he warned that, when adjusted for affordability, even a rate of 14.2% in 1980 would feel like 3% now.

The impact on the housing market

Analysis from RedFin indicates that the heightened cost of borrowing is having a direct impact on how buyers and sellers are behaving in the property market.

"Some listings are growing stale because high mortgage rates and housing costs are causing would-be buyers to back off," Dana Anderson warned.

The slowdown means many buyers are easily able to negotiate below the asking price, especially if a place has been on the market for a few weeks.

A name was put to this in March when the Federal Housing Finance Agency released a working paper describing the "lock-in effect of rising mortgage rates."

"In the United States, nearly all 50 million active mortgages have fixed rates, and most have interest rates far below prevailing market rates, creating a disincentive to sell," the authors wrote.

Researchers found that, for every percentage point where mortgage rates are higher than the base rate, a property is 18.1% less likely to sell.

"More affluent borrowers can better time their home sales strategically, widening the wealth inequality gap," they added. "Even with moderate decreases in interest rates, these effects are likely to remain present for years to come."

More from Creditnews: