They’re Here—7% Mortgage Rates. What Now? Mortgage rates eclipsed 7%, pushing affordability to its limits.

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Mortgage rates briefly rose above 7% on 30-year fixed rate products for the first time since 2002 last week before receding down about 20 basis points to 6.8%, according to Mortgage News Daily. Of course, this is a huge increase from the 3.3% average rates seen back in early 2022. We thought 5% rates were a big jump this summer, but look at where we are now.

Redfin calls this phenomenon “seesawing mortgage rates,” and this volatility is— understandably—a cause of concern for existing homeowners, prospective homebuyers, and investors. Interest rates nearly doubling over the course of a few months have a substantial impact on mortgage costs.

Homeowners on a fixed rate won’t see increases in their monthly payments, but their concerns might lie in their ability to sell a property in a housing market with falling prices and decreasing demand. 

For prospective homebuyers and investors, buying has become that much more unaffordable.

What’s The Impact On Real Estate Investors and Home Buyers?

Let’s drill a little deeper into the impact of interest rate hikes on homebuyers. Stephen Rinaldi, president and founder of the Rinaldi Group, a mortgage broker based near Philadelphia, told CNBC that the impact on many buyers can be described as a “payment shock,” with new payment amounts so high that they are “outrageous.”

For instance, let’s say you bought a $300,000 home this time last year on a 30-year fixed loan when rates were still around 3%. Your monthly payment would have been about $1,250, not including costs like insurance, taxes, etc. The same house this year, at the current rate, would be nearly $2,000 per month.

Related: Discover how to calculate your mortgage payment

Now, this is all part of the Fed’s game plan. They alluded a couple of weeks ago that they basically wanted a housing correction. With all of these 75 basis point rate hikes, we knew the Fed wanted to get to a place where buying homes would become unaffordable for the vast majority of people. They’re finally getting there.

While it is true that rising interest rates make housing less affordable, it is also true that rising interest rates reduce the number of new home listings. That’s because existing homeowners become reluctant to upsize, which would involve taking on a new, more expensive mortgage. They are much more likely to stay put, creating a whole new supply and demand problem. One where, while demand drops, so does supply. Given our already strained supply, you have to wonder how much home prices will actually fall. This concept has been described as the “locked-in” effect.

While we’re no longer seeing the 20%+ price increases of 2020-21, home prices overall have increased by a massive 13% this year. As Zillow points out, “Although home price growth has slowed, the market is far from pre-pandemic norms.”

When Will The Correction Arrive?

As buyer confidence falls, the market will ironically move towards buyer’s market conditions. However, this is unlikely to correspond with a dramatic home price fall, at least on a national average. Some markets, like San Francisco, have had prices fall 20%+ since their peaks earlier this year. But other markets are still increasing, making this a region-by-region situation. So, is there a way to predict when a correction will force a buyer’s market? Hard to say. In some places, it’s already begun.

Real estate investors should also bear in mind that a reduced ability to buy and a reduced supply of new developments (always a by-product of high inflation, high-interest-rate economies) could also drive rent prices up with a slight influx of demand. 

It’s also incredibly important to point out that historically, interest rates are still quite low. Rates were over 18% in 1981, so it could be worse.

In other words, investing in real estate is still profitable. The issue going forward will be finding affordable capital to finance purchases.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.