Here’s a not-so-fun fact: The monthly mortgage payment it takes to buy the typical home in the U.S. is now up by a staggering 55% compared with the start of 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.
The price shock is already having an effect on homebuyers.
Already, online searches for homes for sale are down 10% year over year, according to Daryl Fairweather, chief economist at real estate brokerage firm Redfin. The number of people going to look at homes is down a bit too.
“So we’re seeing some very early signs that buyers are responding to these higher mortgage rates,” Fairweather says.
“It’s pretty insane,” says Nick Cacciatore, who’s looking to buy a house in Tampa, Fla. “It’s very demoralizing.”
Back when Cacciatore was looking last summer, mortgage rates were under 3%. This week they’ve risen to over 5%. While that may not sound like much, it makes a huge difference when you’re buying something as costly as a house. And Cacciatore was looking for homes in the price range of $600,000.
“It added like $700 a month in monthly payments,” he says. “I mean, a ridiculous amount just from the interest rates.” And that doesn’t even factor in the big gain in prices over the past year as he’s been trying to buy a home.
Cacciatore is a lawyer starting a family practice. His fiancé is a veterinarian. So they have good jobs and some savings.
But in this superheated housing market, they kept getting outbid. Now with the higher mortgage rates, they’re looking at smaller, less expensive condos.
Some first-time buyers are giving up completely.
“It’s pretty much gotten them out of the market,” says Gabriela Raimander, a real estate agent in St. Petersburg, Fla. She says she was just talking to a client the other day. “She told me with watery eyes,” Raimander says, ” ‘I just can’t compete in this market. My dream of owning a house will have to be postponed or shelved altogether.’ “
Here’s how the numbers look for the typical home in the U.S.: The median price for a home has risen from $309,200 in December 2020 to $357,300.
Over that same period, interest rates rose from 2.67% to 5.08% this week. With a 10% down payment, that has pushed the monthly payment up from $1,124 to $1,742 — a whopping 55% increase. That’s upwards of $600 a month on that $357,000 home. That’s the impact of higher prices together with rising rates.
If you look at interest rates alone – the 2% rise in interest rates we’ve seen so far adds $115 to the monthly payment for every $100,000 you borrow on a 3o year loan.
It might not be a bad thing. Finally, the overheated housing market might cool down, bringing an end to the frenzied buying and bidding wars.
A slowdown in demand could help give homebuilders time to catch up. A record low supply of homes is a big reason prices have risen so much during the COVID-19 pandemic.
“I think home price appreciation will significantly cool off,” says Fairweather. “We’re going to have a year of pretty flat home price gains in real terms.”
That’s, of course, exactly what the Federal Reserve is trying to do for the broader economy by raising interest rates. The Fed wants to cool off rising prices and inflation by making it more expensive to borrow money.
Still, it’s unclear how much higher mortgage rates are going to go. Unlike rates on credit cards or other types of loans, mortgage rates move early and dramatically in anticipation of what the market expects, for example, the Federal Reserve to do with rates and its bond purchases over the next year. So mortgages could top out around this point, or they could keep rising.
