Fortune

By Lance Lambert

The U.S. housing market was in something of a “deep freeze” in the second half of 2022, as spiking mortgage rates caused housing activity to contract across the nation, and it spurred outright home price corrections in some markets. However, that’s already old news: Mortgage rates that have fallen back under 6.5%, combined with the arrival of the seasonally strong spring sales period, have seen housing markets across the country begin to improve.

Case in point: After falling for seven straight months, U.S. home prices as tracked by Case-Shiller rose in February. The March reading, which publishes at the end of May, is expected to notch another increase.

The U.S. housing market is out of the woods, right? Well, not so fast.

See, the housing market is entering into a pivotal stretch—and it’s happening on two fronts.

First, the U.S. housing market will soon exit the peak season for home price growth. As seasonal spring and summer demand pulls back and the market moves into the slower fall and winter months, some vulnerable housing markets might slip right back into correction mode. Other markets could simply see activity levels, along with existing inventory levels, go back into the “deep freeze.”

Second, mortgage rates could once again test 7%. Over the past week, the average 30-year fixed mortgage rate has inched back up—closing last week at a two-month high of 6.90%. If mortgage rates were to stay there for a prolonged period, or even go higher, it could see buyers and sellers alike begin to pull back again just as they did in the second half of 2022.

The short-term outlook for mortgage rates, of course, is complicated by debt ceiling talks—which are expected to resume on Monday. In the unlikely scenario that the U.S. Treasury were to default—or even appear as though it might default—financial markets could put upward pressure on long-term rates like mortgage rates.

Another big jump in mortgage rates would be a gut punch for many buyers, who were at the brunt of last year’s mortgage rate shock. Already, national housing affordability (or better put—the lack of affordability) has reached levels not seen since the housing bubble era.

“Any major disruption to the economy and debt markets will have major repercussions for the housing market, chilling sales and raising borrowing costs, just when the market was beginning to stabilize and recover from the major cooldown of late 2022,” wrote Zillow economist Jeff Tucker in a recent report. In the “very unlikely” scenario that the U.S. were to default, Zillow says the average 30-year fixed mortgage rate would spike to a peak of 8.4% by September.

While it’s hard to imagine that a default would actually occur, it’s easy to see how uncertainty could cause financial markets to push up long-term rates, like mortgage rates, just as the housing market exits its seasonal strong period. 

Lance Lambert is the editorial director of Fortune Education. He also writes the weekly Fortune Analytics newsletter and reports on topics ranging from the future of work to the housing market.