How rising mortgage rates are reshaping the US housing market

Transcript:

Allie Barefoot: Welcome back to Data in Context. I'm Allie Barefoot with Cotality. This episode is a part of a series where we break down Cotality's monthly Home Price Index Report. On paper, the U.S. housing market looks flat. But beneath the headlines, momentum is shifting meaningfully across the map. A jump in mortgage rates over 6.6% since June has reignited the lock-in effect, cooling summer transaction activity and broadening monthly price drops across 46 out of the top 100 metros. At the same time, we're also tracking a sharp divergence. High-cost coastal markets like San Francisco are hitting a wall of buyer fatigue. Meanwhile, mid-tier markets in the Midwest and Northeast are pushing prices to new heights. So to help us unpack this data and go through September's Home Price Index Report featuring July data, we have Cotality's Chief Economist, Dr. Selma Hepp. Let's put the data in context.

Allie Barefoot: Welcome back to Data in Context, Selma.

Dr. Selma Hepp: Hi Allie, nice to be back with you.

Allie Barefoot: Of course, I always look forward to talking about Cotality's Home Price Index reports with you. So let's go on ahead and jump in and talk about this dominant force that's on everybody's mind right now: mortgage rates. We saw borrowing costs climb from around 6% in the spring to over 6.6% in the summer. So how did that shift immediately alter consumer behavior and cool down that mid-summer momentum that we were seeing?

Dr. Selma Hepp: Yeah, unfortunately, Allie, since summer, we've gone up even higher in terms of mortgage rates, and they've actually crossed 7%. As of today, they're even close to 7.5%. So we've seen a significant surge in mortgage rates, and that's certainly been a cooling factor in the housing market. To give you a sense of numbers, when we move from roughly 6% to just only 6.5%, it's enough to change an affordability calculation for a lot of potential home buyers. When you look at a typical home buyer that's mortgaging their home purchase, that increase can raise their mortgage payment by about 8%. And if you look at that increase to 7% or even higher, it's an 11% plus increase in just their principal and interest. So again, that's before even accounting for taxes and insurance, which is another important consideration that home buyers have been dealing with. And so, generally, how buyers respond to a raise in mortgage rates or their budgets being reduced is they shift towards lower price points, they ask sellers for concessions, or sometimes they just simply step back altogether. On the seller side, usually what happens is that they become even more reluctant to trade in their super-low mortgage rates for a much higher one, so that the result in essence is that two-sided lock-in effect, and we've been talking a lot about that. What it means this time is fewer qualified or willing buyers, fewer discretionary sellers, and then fewer home sales as a result. The other thing is, because this increase arrived just as the normal spring home-buying season tailwind was fading, it did have a bit of a bigger impact on mid-summer momentum. What I mean by that: prices were essentially flat in July versus the trend that we saw prior to the pandemic, where June to July we would see about a 0.4% increase in home prices.

Allie Barefoot: Yeah, it really sounds like that rate pressure is creating this stark tipping point for monthly price trends and for first-time home buyers and such. And the Cotality Home Price Index Report, it highlights that 19 of the top 100 metros posted negative three-month price momentum in July, which is nearly double from June. Do you think that mortgage rates are the primary catalyst driving these monthly pullbacks, or is there another factor? I know you said that insurance trends are also important as well.

Dr. Selma Hepp: So mortgage rates are an immediate catalyst, but that's not the only explanation for slowdown that sometimes happens as mortgage rates go up. You have higher borrowing costs that are weakening purchasing power across country, but the magnitude of pullback also does depend on local conditions. We talked a lot about that in our previous talks. Markets with more inventory, with heavier new construction pipelines, just generally softer labor markets, or prices that had outrun incomes in the last couple of years do tend to correct a little bit more quickly or have a higher reaction to higher mortgage rates. Whereas you have supply-constrained markets like Midwest, Northeast—and we've been talking about those a lot too—they still have low inventories and that is still cushioning prices. So mortgage rates can set the direction, but it's really about also inventory, affordability, and local economic strength that determine the speed of the slowdown.

Allie Barefoot: Right. Well, mortgage rates obviously affect the nation as a whole. You know, you always emphasize that local economics also do play a huge role in where that person is buying a home. I want to kind of shift here into the regions where higher rates are interacting with expanding supply. States like Texas and Colorado, they entered the negative territory annually. But also, Texas and Florida, how are you seeing 6.6% and more mortgage rates compounding with rising property taxes and insurance to shift market balance?

Dr. Selma Hepp: Yeah, again, this is where it's not just about mortgage rates. But in Texas and Colorado as an example, the mortgage rate is just one of the layers of that affordability burden. Buyers are being underwritten for total monthly cost of homeownership, and rising property taxes, insurance premiums, homeowner association fees, and in some areas wind and flood coverage can add hundreds of dollars per month. So at the same time, these states have generally also added more supply, both existing and newly built homes. And the new homes do tend to come with builder incentives. So that gives buyers more alternatives and forces sellers really to compete on price, concessions, and condition of the property. So in those markets, you may see a little bit more of a reaction or impact of higher mortgage rates on home prices. But again, what is happening in these areas is that you do have a balance that's shifting a little bit more towards buyers. It's unevenly and it's not the same across the entirety of these states, because well-located, affordable submarkets, for example with strong job growth, tend to remain resilient. While you have those pockets that had a lot of investor-heavy activity, higher insurance premium growth, and also a lot more supply being added that are seeing more pronounced price pressures.

Allie Barefoot: Month over month, Selma, we talk about the Home Price Index Report and we've really mentioned a couple of areas a few times. Abilene, Texas, being one of them, it surged over 13.3% year over year, and that was driven by local AI investor activity. And then we also look at the high-cost coastal tech hubs, Napa, wine country, that fell 4.3%. So looking ahead at the rest of 2026, if mortgage rates stay range-bound, whether it's between 6.5% and 7%—none of these numbers sound great—what dynamic should buyers and sellers expect?

Dr. Selma Hepp: Yeah, that's a great question. Really the contrast between Abilene and Napa illustrates why local fundamentals matter so much. One market, Abilene for example, you have a lot of targeted investment, wage growth, demand for homes is driven by job growth, by population growth. And that's happening even in a state that's overall softer—we talked about how Texas overall is softer. And then you have Napa, which is a more expensive, discretionary market. It tends to be more of a retiree market and a lot more cash sales, so the demand may not be as much driven by what's going on in mortgage world as it is if the demand remains persistent from those potential buyers. So, but generally speaking, when we think about if rates are 7% and higher, I think we would expect home sales activity to be relatively more muted than if mortgage rates have remained closer to 6%. But again, local dynamics are really, really important here in really how the story plays out.

Allie Barefoot: Right. And as we look toward the last three months in 2026—which is crazy to even say—is there anything that market participants should be keeping at the top of their mind? Obviously, mortgage rates are kind of weighing heavy on the shoulders right now. Is there anything that they should be looking to?

Dr. Selma Hepp: Yeah, I think the most important point is again something we talk about a lot, is that the national average may be becoming less informative. Overall, yes, we say that national appreciation is up about 1.4% in the latest data, but the state and metro outcomes have ranged, and some have seen significant gains to outright decline.

So market participants should really watch for four things, I'd say: number one, is the direction of mortgage rates, if they have a constrained budget. Then the balance between new listings and buyer demand—how competitive the market is.Changes in the local employment and wages—can you afford or are there job potential for you to move up that economic ladder. And the full cost of homeownership—that's really important, not just the home price: insurance, property taxes, down the road can you afford that.

The other thing to distinguish is, are we in a normal seasonal cooling, or is it a sustained loss of momentum in a market? And we can see that by observing these three-month trends that we were talking about, also if you look at price cuts, days on market, and concessions that potential home buyers are getting.

So what I see the remainder of 2026 looking like, it's really about rewarding local knowledge, being realistic about pricing, more so than broad assumptions about whether a housing market is simply up or down.

Allie Barefoot: Well, I look forward to continue breaking down this data from Cotality's monthly Home Price Index Report as we enter October, November, and December, and see where 2026 wraps up. But thank you so much for shedding a little bit of light into the numbers of the September Home Price Index Report here, Selma.

Dr. Selma Hepp: Thank you so much for having me again, Allie. It was a pleasure.

Allie Barefoot: Of course.

Allie Barefoot: Thank you again to Dr. Selma Hepp for joining us here on Data in Context, and thank you so much for listening. If you haven't already, subscribe to Cotality's YouTube channel, and as always, if you want to find out more information, head on over to cotality.com.