As Mortgage Rates Approach 7%, Housing Market Faces Crisis

The Federal Reserve has indicated it will raise rates at least four times this year. Each was expected to be a quarter of a percentage point. Now, as inflation rages, there is talk that some will be half a point. Recently, there was talk that one of the bumps would need to be three-quarters of a point if surges in the consumer price index do not cool.

There are many reasons inflation will not slow and may pick up the pace. The Russian invasion of Ukraine and resulting sanctions on Russia will keep crude prices above $100 a barrel. China’s oil demand has dropped because of a huge outbreak of COVID-19. Certainly, if other nations are an indication, that will end in a few weeks, or perhaps two or three months. China’s appetite for crude will renew.

Ukraine’s trouble also will put pressure on worldwide food prices. It is among the largest grain exporters on earth.

Mortgage rates already have reached 5%, up from below 3% for some just a year ago. Mortgage rates are not entirely pegged to the Fed, but there is a close relationship.

Add to the mortgage rates problem the fact that the median price of an existing home in the United States has just reached a record of $375,300. New home construction has been hampered by supply chain slowdowns and the price of construction material.

No one expects a 2008 home price collapse. As that financial crisis spread, homes in some parts of the country dropped by almost half.

A housing crisis will not be a crisis for everyone. Anxious buyers will have to pay high mortgages rates but will find that home prices in many areas have dropped. This could happen by the end of the year. Sellers, who have done so well for so long, will bear the brunt of the ongoing increase in mortgage rates.

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