Higher interest rates have cratered demand for mortgages

Mortgage rates rose again last week, which means that demand for home loans went down. In fact, demand has dipped to a two-year low.

Mortgage rates have gone up this year because of government debt, trade wars, oil prices, “and then at the same time, we're also spending a lot on AI,” said Zillow senior economist Kara Ng, “and that kind of debt has sort of pushed up borrowing costs across the board.”

Sure, today’s mortgage rates pale in comparison to 15% in the ‘80s, Ng said. “But think about where home prices are compared to incomes. Your income, your borrowing costs, and the price of your home — all that has evolved since the days when mortgage rates were higher.”

Ng doesn’t see double-digit mortgage rates returning, but neither are the 3% rates from the pandemic, said Timothy Savage, who teaches at NYU’s Schack Institute of Real Estate.

Because that’s when people relocated out of high-demand areas, “we're back into a world where basic supply and demand relationships have reemerged,” he said.

As for what’s next, mortgage rates will probably decline when the war in the Middle East ends. But, “I have no idea when the war in Iran is going to end,” admitted Richard Green, the director of the USC Lusk Center for Real Estate.

Plus, Green noted that government debt keeps climbing, which means the demand for borrowing climbs, too. And that all means that mortgage rates could stay elevated.