Here’s a not-so-fun fact: The monthly mortgage payment required to buy a typical home in the US is now up a staggering 55% compared to where it started last year. That’s because of the dramatic rise in mortgage rates in recent weeks, on top of price gains in the hot housing market.
“It’s pretty crazy,” says Nick Cacciatore, who wants to buy a home in Tampa, Florida. “It’s very demoralizing.”
Back when Cacciatore checked last summer, mortgage rates were below 3%. This week they have increased to over 5%. That might not sound like much, but it makes a world of difference when you’re buying something as expensive as a house. And Cacciatore was looking for homes in the $600,000 price range.
“Monthly payments came out to about $700 a month,” he says. “I mean, a ridiculous sum from the interest alone.”
Cacciatore is a lawyer starting a family practice. His fiancé is a veterinarian. So you have good jobs and some savings.
But in this overheated housing market, they were repeatedly outbid. Now with higher mortgage rates, they’re looking for smaller, less expensive condos.
Some first-time buyers give up completely.
“It pretty much took her out of the market,” says Gabriela Raimander, a real estate agent in St. Petersburg, Fla. She says she spoke to a client the other day. “She told me with tears in her eyes,” says Raimander, “‘I just can’t compete in this market. “
Here are the numbers for the typical home in the US: The median price for a home has increased from $309,200 in December 2020 to $357,300.
During the same period, interest rates rose from 2.67% to 5.08% this week. With a 10% down payment, this has increased the monthly payment from $1,124 to $1,742 — a whopping 55% increase, with most of it due to the increase in mortgage rates.
Online searches for “property for sale” are on the decline
The price shock is already affecting homebuyers.
Online searches for homes for sale are already down 10% year over year, according to Daryl Fairweather, chief economist at real estate brokerage firm Redfin. The number of people looking at houses has also decreased somewhat.
“So we’re seeing some very early signs that buyers are reacting to these higher mortgage rates,” Fairweather says.
Higher mortgage rates could finally cool down the hot real estate market
It might not be a bad thing. Finally, the overheated housing market could cool down and put an end to the hectic buying and bidding wars.
A slowdown in demand could give builders time to catch up. A record low housing supply is a big reason why prices have risen so much during the COVID-19 pandemic.
“I think the rise in home prices will slow down significantly,” says Fairweather. “We’re going to have a year of fairly flat house price gains in real terms.”
Of course, that’s exactly what the Federal Reserve is trying to do for the broader economy by raising interest rates. The Fed wants to cool rising prices and inflation by making it more expensive to borrow money.
It’s still unclear how much higher mortgage rates will go. Unlike credit card or other types of lending rates, mortgage rates move early and dramatically in anticipation of what the market expects, such as the Federal Reserve’s rates and its bond purchases next year. So mortgages could top out around that point, or they could keep going up.
In the Seattle area, Alex Bacon isn’t waiting to find out.
“We’re really excited to move,” she says. Bacon and her husband are preparing to sell their very small starter house, which they bought about five years ago. It was all they could afford, and it’s right under the Seattle airport approach path.
“I’m at the end of one of the runways right now, so the air just smells like jet fuel,” she says. “I can’t invite people to barbecues because you have to pause for 30 seconds in your mind every time you talk,” she says, as a 747 roars over her backyard.
After the pandemic, Bacon realized she could work remotely. She is a project manager at a medical technology company. So the couple’s plan was to move two hours north to a smaller, more affordable city and buy a larger home that wasn’t next to an airport.
But with interest rates rising, they hurry. They pack up and move as soon as they can buy the house.
“We’re starting to see interest rates around 5%, and I’m just so scared that if they get too much higher, we won’t be able to afford the house we want up there,” she says.
Your current house has increased in value in recent years, also with the airplanes.
This applies to anyone who already owns a home. They’re in a much better position than a first-time buyer because when they sell their home, they’ll likely have a nice chunk of cash for a down payment on a new location.