Housing Market Cools as Mortgage Rates Tick Back Above 7%
The U.S. housing market showed fresh signs of cooling in February as mortgage rates climbed back above 7%, pricing out many would-be buyers and dragging existing home sales to their lowest level in four months.
The National Association of Realtors reported that existing home sales fell 3.4% from January to a seasonally adjusted annual rate of 3.97 million units — below the 4.1 million pace economists had expected.
Rates Are the Culprit
The average rate on a 30-year fixed mortgage climbed to 7.04% last week, according to Freddie Mac, reversing a modest decline seen at the start of the year when investors had hoped the Federal Reserve would begin cutting rates sooner.
At today's rates, the monthly payment on a $400,000 mortgage is roughly $2,670 — about $800 more per month than three years ago when rates were near 4%.
Inventory Ticks Up, but Not Enough
The number of homes available for sale rose 5.2% from January to 1.08 million units, representing a 3.3-month supply — well below the 4-to-6 months typically considered a balanced market.
- Median existing home price: $412,500, up 4.1% year-over-year.
- First-time buyers accounted for 26% of sales, down from 28% a year ago.
- All-cash sales represented 33% of transactions, above the historical norm.
- Distressed sales remained low at 2% of total sales.
“Affordability conditions are still very challenging for first-time buyers. Until rates come down meaningfully or we see a significant surge in new listings, activity is going to remain subdued.”
The Lock-In Effect
Much of today's low inventory traces back to a phenomenon economists call the 'lock-in effect.' Millions of homeowners refinanced or bought during the era of sub-4% mortgage rates in 2020 and 2021. Selling now and buying a similarly priced replacement home would mean trading that low rate for one closer to 7% — often adding hundreds of dollars to the monthly payment even without a change in home price. That math keeps many would-be sellers in place, which in turn keeps inventory tight and props up prices even as higher rates simultaneously squeeze buyer demand.
For buyers navigating this market, the rate environment changes the math on renting versus buying, and on timing a purchase versus waiting. A widely used rule of thumb is that home payments — including principal, interest, taxes, and insurance — should stay under roughly 28% of gross monthly income. At current rates, that threshold prices out a meaningfully larger share of first-time buyers than it did when rates were near 4%, which is part of why first-time buyer participation has been trending below its historical norm. Buyers who can be flexible on timing sometimes benefit from waiting for either rates or prices to soften, while buyers who need to move now for personal reasons are increasingly turning to adjustable-rate mortgages or rate buy-downs to manage the higher upfront cost.