Mortgage rates crossed the 7% threshold this past week, as the 30-year fixed rate hit 7.31% according to Freddie Mac data. This marks the highest level for mortgage rates since late 2000.
The implications extend far beyond the housing market alone. The sharp rise in rates stands to impact the stock market, economic growth, and investor sentiment through various channels.
For stock investors, higher mortgage rates pose risks of slower economic growth and falling profits for rate-sensitive sectors. Housing is a major component of GDP, so a pullback in home sales and construction activity would diminish economic output.
Slower home sales also mean less revenue for homebuilders, real estate brokers, mortgage lenders, and home furnishing retailers. With housing accounting for 15-18% of economic activity, associated industries make up a sizable chunk of the stock market.
A housing slowdown would likely hit sectors such as homebuilders, building materials, home improvement retailers, and home furnishing companies the hardest. Financial stocks could also face challenges as mortgage origination and refinancing drop off.
Broader economic weakness resulting from reduced consumer spending power would likely spillover to impact earnings across a wide swath of companies and market sectors. Investors may rotate to more defensive stocks if growth concerns escalate.
Higher rates also signal tightening financial conditions, which historically leads to increased stock market volatility and investor unease. Between inflation cutting into incomes and higher debt servicing costs, consumers have less discretionary income to sustain spending.
Reduced consumer spending has a knock-on effect of slowing economic growth. If rate hikes intended to fight inflation go too far, it raises the specter of an economic contraction or recession down the line.
For bond investors, rising rates eat into prices of existing fixed income securities. Bonds become less attractive compared to newly issued debt paying higher yields. Investors may need to explore options like floating rate bonds and shorter duration to mitigate rate impacts.
Rate-sensitive assets that did well in recent years as rates fell may come under pressure. Real estate, utilities, long-duration bonds, and growth stocks with high valuations are more negatively affected by rising rate environments.
Meanwhile, cash becomes comparatively more attractive as yields on savings accounts and money market funds tick higher. Investors may turn to cash while awaiting clarity on inflation and rates.
The Fed has emphasized its commitment to bringing inflation down even as growth takes a hit. That points to further rate hikes ahead, meaning mortgage rates likely have room to climb higher still.
Whether the Fed can orchestrate a soft landing remains to be seen. But until rate hikes moderate, investors should brace for market volatility and economic uncertainty.
Rising mortgage rates provide yet another reason for investors to ensure their portfolios are properly diversified. Maintaining some allocation to defensive stocks and income plays can help smooth out risk during periods of higher volatility.
While outlooks call for slower growth, staying invested with a long-term perspective is typically better than market timing. Patience and prudent risk management will be virtues for investors in navigating markets in the year ahead.
