Mortgage rates hit highest level since 2002

Rates on 30-year fixed mortgages reached 7.09 percent this week, the highest level since April 2002, according to Freddie Mac. Interactive Brokers Senior Economist José Torres joins Yahoo Finance Live to discuss how high mortgage rates are impacting the housing market.

These high mortgage rates constrain the housing market, Torres says. Existing homeowners "are stuck with low rates and they don’t want to sell" because they will likely have higher monthly payments on another property, "that’s constraining transactions in the existing home sale market," Torres explains. The new home sale market "is doing a little better this year, however, affordability just remains too constrained with rates above seven percent," Torres says.

High mortgage rates also constrain "the real estate section of the economy," as "everything that’s related to real estate starts to deteriorate whenever you have transactions down this much," Torres notes. Long-term rates could also go higher and Torres says he’s nervous if rates reach 7.5 or 8 percent that will cause "some price corrections in the real estate market."

Video Transcript

- Mortgage rates topping 7% this week, hitting levels that we haven't seen in more than two decades. The average rate for a 30-year fixed mortgage rising to 7.09%. That's the highest point that we've seen since April of 2002, and is just the third time that rates have exceeded 7% since then. For more on what this means for the broader economy, we want to welcome in Jose Torres, Interactive Brokers senior economist.

Jose, it's great to see you again. So let's talk about the fact that we're seeing mortgage rates once again on the rise reaching levels like I just said that we haven't seen in about 21 years. What does this do to the housing market? And what does this do to the broader economy?

JOSE TORRES: Thanks for having me. Well, unfortunately, rates this high what it does is that it constrains the housing market. And right now, you have existing homeowners with their stuck with low rates and they don't want to sell and then have to go assume thousands more in monthly payments on another property. So that's constraining transactions in the existing home sale market.

Now, the new home sale market is doing a little better this year. However, affordability just remains too constrained with rates above 7%. Like you said, these are rates that we haven't seen in a really long time pre-great financial crisis. And it constrains the real estate section of the economy, which makes up about a fifth of it.

So anything from construction workers, durable goods manufacturers, materials, folks, everything that's related to real estate starts to deteriorate whenever you have transactions down this much. Now, another difficult situation is the fact that rates can continue to go higher, you have the Fed not buying long term bonds, you have the US Treasury with a high need to borrow, and you also have sticky inflation. So long-term rates could go higher from here. So I'm a little nervous if rates go to 7.5 or 8 that will have some price corrections in the real estate market.

- So what's the expectation for what would happen if it went to-- I almost want to say God forbid-- 8%. I mean, you know, I haven't seen levels like that-- I want to say in my lifetime I was living in the '80s. So I know it's been worse. But what's the expectation for what it would do to the housing market? Given the constraint we already see there.

JOSE TORRES: And to your point, a lot of folks say, well, we've had rates like this in the past, but what we haven't had is rates and prices this high simultaneously. And I think that's the important constraint. And the higher-- the longer that rates stay above 7% or even if they go to 7 and 1/2% or 8%, you know you're going to have some problems, you're going to have some forced selling eventually, maybe not in the single-family market, but in the multifamily market where you've had a lot of construction. You could have some forced selling there, you could have some for selling and Airbnb.

On the commercial side, a lot of the rates are floating rates. So a lot of folks that made investments in 2021 with rates at 3%, now that's repriced to 7% and 8% maintenance costs have gone up, insurance costs have gone up. And it really weighs on the real estate sector overall.

- So Jose, we have some worry just about what the real estate sector is going to look like here, at least in the short term. But when you take a look at some of the recent estimates that we're getting out, Atlanta Fed seeing third quarter GDP growth of 5.8%.

We talk about the fact that the economy has certainly surpassed. Many forecasters expectations up until this point. But 5.8% growth, is that realistic?

JOSE TORRES: No, it's not realistic. And Atlanta GDP tends to be very, very hot initially sometimes, and you know, it could be very volatile. It's not realistic. Now, what is true about what you said, is that a lot of us have been surprised by the strength of the consumer. We didn't think that the consumer would be able to digest all these rate hikes, and have their pandemic savings begin to dwindle, and rack up all this credit card debt, and then you also have looming student loan payments coming on in October.

So we've all been surprised. But I think that the consumer is going to begin to slow down after Labor Day. More significantly, I'm starting to see that in travel bookings, and restaurant reservations, we're starting to see at the margins the consumer start to lose momentum. And that is going-- I think is going to happen at the same time that the long and variable lags of the Federal Reserve's monetary policy start to hit the economy. So we could have a soft patch in late '23, early '24.

- And what does-- how does that bode for the overall economic picture, especially to your point, there's data out from the Federal Reserve Bank of San Francisco pointing out what's happening with regard to that weakening and savings that we're seeing and the spin off of that excess savings that people had during the pandemic. What is the expectation for where we land by the time this year closes out economically?

JOSE TORRES: You know, I think the consumer is going to stay afloat, and I think the saving grace for the consumer is this hot labor market that we have. And businesses are immune to these interest rate hikes at this juncture, because they're flush with cash and they want to earn returns, and there's labor shortages.

So consumers, even if they're having affordability troubles or budget constraints, they can still go out there, get a job, have some good strong wage gains to offset a lot of those pressures. So I think that what if we do get that soft patch in late '23, early '24, It's not going to be a Tikhonov of recession that we're used to seeing where there's a lot of joblessness. We'll have a slight tick up in the unemployment rate.

And folks will feel it more from an affordability standpoint, they'll start to trade down, companies will start to invest a little less, but it won't be significant unemployment like we've seen in previous cycles. The demographics, just don't support that, and corporate appetite to earn returns and make money is just too high right now.

- Jose, there's this long going debate right now about excess savings, and what exactly those levels look like some, like you have the San Francisco Fed here saying that there's not much left. You have others that say actually the situation looks OK. Does this argument or does this debate still matter as much given the fact that we have seen inflation pretty steadily ease here over the last year or so?

JOSE TORRES: Yeah, I think it matters and I think the reason it matters is, what's the cost of bringing inflation down, right? And some of it is corporate pricing power declining margins, contracting earnings not being as good. So and then of course, consumers not having that tailwind of nominal prices going up and all of their incomes going up.

So as inflation comes down, and those interest rates hikes in that balance sheet reduction, and also the credit crunch that we've been experiencing at the margins due to the regional banks, when that starts to hit all at the same time that the consumer is slowly, slowly weakening, now that could pose some risks looking forward.

But also the market is doing very well this year, up about we're in a soft patch now, rough seasonal period, but the market's doing really well. And young folks are involved, and they're happy that the market's going up, and that's giving them extra purchasing power. Also, the propensity to save isn't that high, because how's the housing market is so out of reach for so many individuals, durable goods also out of reach for many individuals, cost of financing too high, prices too high, access to credit not as high.

So those things in combination make it where consumers want to invest on services. They want to travel, they want to go out and eat, they want to enjoy themselves. And that's what's been most problematic with inflation has been labor intensive services, and that's what we've been seeing consumers do in an environment where houses and durable goods are too expensive.

- And we certainly have seen that reflected in the recent numbers. All right. Jose Torres, Interactive Brokers, senior economist. Thanks so much.