Mortgage rates jumped above 7%. Is a real estate crash coming?

Mortgage rates hit 20-year high ahead of Wednesday's rate hike Last week, 30-year fixed-rate mortgages averaged above 7% for the first time in 20 years. The news is a surprising sign ahead of the Fed's planned rate hike on Wednesday. Some economists and analysts believe continued rate hikes could push mortgage rates even higher by 2023.

30-year fixed mortgage rates averaged just 7% last week, the first time in 20 years, according to Freddie Mac. With the Federal Reserve expected to announce another major interest rate hike, this could be evidence of a larger downturn in housing. What does rising mortgage rates mean for a possible housing market crash?

Well, with housing affordability already trending towards its worst on record, rising mortgage rates only strengthen the case for a malicious decline in house prices. While some naysayers may argue that we're still a long way from the 18% mortgage rate peak of the 1980s, they ignore the disproportionate growth in house prices relative to incomes.

Indeed, in August, housing affordability in the United States fell to its lowest level since 1989 due to high house prices, rapidly rising mortgage rates and relatively stagnant wage growth . In fact, the median home price soared to $440,300 in the second quarter of this year, the first time that figure has breached the psychological barrier of $400,000.

House prices have been on an almost vertical trajectory since the Covid-19 pandemic forced Americans home. Lately, however, the once-hot real estate market has been freezing cold. According to the National Association of Realtors (NAR), sales of single-family homes are down 23% from last September, with mortgage application volumes at their lowest since 1997.

While many economists argue that higher lending standards and a generally limited housing stock will prevent a substantial decline in house prices, that's not the whole story. A sharp decline in housing demand caused by a Fed-induced recession could put unexpectedly strong downward pressure on the housing market.

The Fed has long hinted that its inflation-mitigation program is far from over and could have unfortunate consequences for the broader economy. Even Fed Chairman Jerome Powell has said the central bank's hawkish agenda could well lead to a broader recession in the country. “No one knows if this process will lead to a recession or, if so, how big that recession would be,” Powell said in September.

In 2021, 30-year fixed rate mortgages had an average lending rate of just 2.96%, near its pandemic low. As the Fed raised interest rates several times throughout the year, mortgage rates rose significantly. Clearly, the Fed's rate hikes throughout the year had a dramatic effect on home lending. Looking ahead to the next highly anticipated Fed meeting on Wednesday, it looks like the stage is set for even higher mortgage rates.

With what will likely be its fourth "oversize" rate hike of 75 basis points this week, and another hike expected in December, the Fed could well write the script for mortgages heading into 2023 The question remains: how high will the rates go?

Well, depending on who you ask, you'll probably find a variety of different projections. According to some, however, the 30-year fixed rate has plenty of room to climb over the next year.

Christopher Whalen, president of Whalen Global Advisors, told MarketWatch that mortgage rates could "easily hit 10% by February," even if the Fed refuses to raise interest rates in December.

Moreover, the NAR's chief economist, Lawrence Yun, estimates that rates could reach 8.5% next year, "which would be another significant shock to the housing market".

First published on InvestorPlace.