Bank of America warns mortgage rate changes could have major housing market impact

When inflation surged in 2022, mortgage rates rose in tandem, doubling from 3% to above 7% over a few months.

Although mortgage rates hovering between 6% and 7% may seem astronomical compared to Covid-era rates, they are in line with historical averages dating back to the 1970s. Homeowners with higher mortgage rates always have the option to refinance, to reduce their loan balance and monthly payments.

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The New York Federal Reserve's quarterly household debt report shows that mortgage balances and delinquencies have trended upward over the past few years.

Recent research from the Bank of America Institute also indicates that heightened mortgage rates, sluggish housing activity, and rising mortgage balances are feeding into housing uncertainty.

While the housing market has been rattled by elevated mortgage rates and weakened homebuyer demand, Bank of America economists warn that rising mortgage loan balances aren't necessarily a reason to panic — yet.

Rising home prices, high mortgage rates, and a lack of affordable housing options have weakened homebuyer demand over the past few years. Although mortgage balances are increasing, research from the Bank of America Institute shows that it may not mean disaster for the housing market.

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Bank of America sounds the alarm on rising mortgage debt balances between 2019-2025

Mortgage rates were relatively stable between 2010 and 2020 in the aftermath of the Great Recession and the subprime mortgage crisis, averaging around 4% across most of the decade.

Although 2020 and 2021 saw historically low mortgage rates, skyrocketing rates in 2022 and beyond inexplicably raised the cost of buying a home for a new generation of homebuyers. The majority of Millennial and Gen Z homebuyers note that even mortgage rates falling below 6% would be enough to incentivize them to enter the housing market.

In a recent report on household debt, the Bank of America Institute highlights that mortgage loan balances in June were 32% higher than 2019 levels.

In an exclusive quote to TheStreet, Bank of America Institute Taylor Bowley notes that many homebuyers who have purchased a home in recent years are feeling the squeeze of elevated mortgage rates.

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“One reason for the rise in mortgage balances is because those who obtained mortgages in the past couple of years did so when home prices and mortgage rates were high, especially for lower-income FHA borrowers,” Bowley said.

“Those individuals may have hoped that mortgage rates would come down when they got the mortgage, which of course hasn’t happened. So, some degree of stress is kicking in.”

The report underscores that the acceleration of mortgage debt growth has slowed, but rising balances and increased payments could increase financial strain for some homeowners.

Bank of America highlights that low-interest mortgage balances will anchor the housing sector

Despite rising mortgage balances in the midst of a cost-of-living crisis and sluggish housing sales this year, the prognosis for the housing sector is promising.

More than 71% of outstanding mortgage loan debt is tied to mortgages with rates below 5%, meaning the majority of homeowners still have competitive mortgage rates that keep debt ratios low overall.

“Overall, it’s important to be clear that the household sector actually is in fantastic shape, primarily because so many people still have low mortgage rates from the pandemic era, making debt service ratio still very low,” Bowley continued.

However, homebuyers just now attempting to purchase a home may not be as lucky, with housing prices significantly higher than they were just a few years ago, and mortgage rates proving to be stubborn.

Mortgage loan delinquencies have ticked upwards since the beginning of 2021, indicating that homeowners are having an increasingly difficult time making timely mortgage payments.