The economic shock hitting the housing market just got bigger

The bad news for homebuyers? That already big economic shock got even bigger last week. On Thursday, Freddie Mac reported that the average 30-year fixed mortgage rate hit 4.67%. Just one week earlier the rate was at 4.42%. Meanwhile, back in December it was 3.11%.

Soaring mortgage rates, of course, are an immediate hurdle to the demand side of the market. Rising mortgage rates mean some borrowers—who must meet lenders’ strict debt-to-income ratios—will lose their mortgage eligibility. Borrowers who do maintain their mortgage eligibility could still be deterred by the additional cost it adds to their payment. A borrower who took on a $500,000 mortgage at a 3.11% rate would get a monthly mortgage payment of $2,138. At a 4.67% rate, that monthly payment soars to $2,584. Over the course of the 30-year loan, that’s an additional $160,698.

But industry insiders say we shouldn’t pencil in a housing crash. Instead, many housing analysts say rising mortgage rates should be enough to cool down the market—but not enough to crash it. As buyers back off a bit, that could allow inventory to rise. If the number of U.S. homes for sale, which is still 48% below its pre-pandemic level, can tick up, that might be enough to break the frenzy that has sent the housing market into unsustainable levels of price appreciation.

“The housing market has gone into a savagely unhealthy stage. Everyone should embrace higher rates to cool off this madness and hope inventory rises,” Logan Mohtashami, lead analyst at HousingWire, tells Fortune. “Let higher rates do their thing.”

In March, the U.S. housing market remained red-hot despite soaring mortgage rates. However, many of those March buyers—in particular on the new home side—already had their mortgage rates locked in at January or February rate levels. Buyers these next few months won’t be as lucky.

“As rates quickly approach 5%, we expect their impact on homebuyer demand to change from a motivator—driving a sense of urgency to buy before rates rise further—to a deterrent—causing buyers to step back as the cost of homebuying exceeds their budgets. There are a number of early signs that this shift is beginning to take place,” wrote economists at Redfin on Thursday.

Redfin economists say these higher mortgage rates should see home price growth “start to slow in the coming months.”

If soaring mortgage rates can rein in unsustainable home price growth (see chart above), it would represent, to a degree, a mission accomplished for the Federal Reserve. After all, the underlying reason why the Federal Reserve is putting upward pressure on interest rates is to limit inflation. The unsustainably hot housing market is among the biggest contributors to runaway price growth happening across the economy. We’re even starting to hear central bank staffers use the B-word: bubble. Last week, researchers at the Federal Reserve Bank of Dallas released a research paper titled Real-Time Market Monitoring Finds Signs of Brewing U.S. Housing Bubble.

“Our evidence points to abnormal U.S. housing market behavior for the first time since the boom of the early 2000s. Reasons for concern are clear in certain economic indicators…house prices appear increasingly out of step with fundamentals,” wrote the Dallas Fed researchers.