Housing market chills as mortgage rates, prices scare buyers

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It’s the summer that cooled off the housing market.

Rising mortgage rates have combined with already high home prices to discourage would-be buyers. Mortgage applications have declined sharply. Sales of previously occupied homes have fallen for five straight months, during what is generally the busiest time of year in real estate.

The rate on a 30-year mortgage averaged around 5.51% last week, according to mortgage buyer Freddie Mac; a year ago it was close to 2.88%. The increase in rates is leaving buyers with some unwelcome options: pay hundreds of dollars more for a mortgage, buy a smaller home or choose to live in a less desirable neighborhood, or drop out of the market, at least until rates come down.

All signals point toward the Federal Reserve continuing to raise interest rates to combat inflation, promising little relief for potential buyers at least for the rest of the year.

Kyle Tomcak, 39, was in the market for a home priced around $450,000 to support his in-laws. Tomcak and his wife bid on every house they toured, regardless of whether they fell in love with the home or not.

Tomcak, a project manager for a commercial painting company from Aurora, Colorado, said his search became increasingly dispiriting as he not only lost out to investors fronting cash offers $100,000 over asking price but as mortgage rates started to balloon.

Tomcak had hoped to lock in a monthly mortgage payment of $2,350. Higher rates meant he’d have to alter his search. His mortgage consultant recommended dropping the maximum price he’d pay for a home, first to $300,000 then to $200,000.

“All of a sudden, your buying power is less … even though your payments are the same,” said Tomcak, who has pulled out of the housing search.

Data provided to The Associated Press by the real estate data company Redfin shows how much home a buyer could get with a $2,000 a month mortgage payment. In Providence, Rhode Island, for example an average buyer a year ago could have purchased a roughly 4,900-square-foot home for that size mortgage payment. Now that amount only gets a buyer a 2,200-square-foot home.

In Seattle, a hotter housing market, a $2,000-a-month payment this time last year would have gotten a buyer a modest 1,300-square-foot home. That sort of payment would get them only a 950-square-foot apartment now.

“Simply put, people cannot afford the same home as they could have a year ago,” said Daryl Fairweather, an economist with Redfin.

Besides pushing would-be homeowners to reconsider their home search, rising rates are also forcing a growing number of buyers who struck a deal on a house to back out. About 60,000 home-purchase deals fell through in June, representing nearly 15% of all homes that went under contract last month, according to Redfin. That’s up from 12.7% in May and 11.2% a year ago.

For more than a decade, potential homebuyers were willing to put up with rising home prices because the cost of a mortgage was at historical lows. The average mortgage rate on a 30-year fixed-rate mortgage mostly stayed below 4.5% for most of the last decade, according to data from the Federal Reserve Bank of St. Louis.

The financial data firm Black Knight estimates that the rise in mortgage rates has increased a typical borrower’s monthly payment by 44% since the beginning of the year. Since the start of the pandemic, the average mortgage payment has doubled to more than $2,100.

Most of the pain is being felt at the bottom of the market: the first-time homebuyer, who often has the least amount of money for a down payment and is trying to make the monthly payment work for their budget. Sales of homes priced below $250,000 fell by more than 30% in June.

For those who can afford to buy a home even with higher mortgage rates, the housing market slowdown has a silver lining — more options. As homes get fewer offers, they tend to linger on the market longer. The number of homes for sale, which has been rising from ultra-low levels since the spring, increased 18.7% from a year earlier, according to Realtor.com.

The market has changed dramatically for sellers as well.

Raymond Martin and his wife listed their home in Austin, Texas, for sale for $1.1 million in early May. They figured selling the four-bedroom, three-bath house would be “a walk in the park.”

The couple had reason to be optimistic. As recently as this spring, it wasn’t unusual for sellers to receive multiple competing offers within hours of listing their home, or for some buyers to agree to pay well above asking price while giving up their right to a home inspection — all to beat out rival bidders. It was very much a sellers’ market.

Instead, the Martins have yet to receive a single offer and have lowered their asking price to $899,000. Raymond Martin, 51, noted that shortly before listing his Austin home, a neighbor sold their similar-sized home for $100,000 over the $1 million asking price.

The couple are living in a new home in Florida while patiently trying to sell the Austin property. “Clearly, the market’s kind of stalled,” he said.

Historically, late spring to early summer is peak home buying season in the U.S., but there are multiple signs that buyers have become discouraged.

The number of Americans applying for a mortgage is down significantly from a year ago. Weekly mortgage applications tracked by the Mortgage Bankers Association are down roughly 50% from a year earlier. The decline in mortgage applications could signal a slowdown in future homebuying activity, since potential homebuyers do not apply for a mortgage unless they have settled on a particular home or condo.

Joe Luca, a realtor and past president of the Rhode Island Association of Realtors, said buyers are having to refine their search, settling for smaller homes, or choosing a neighborhood further from a city center.

“People may be looking to buy a house in a really nice town in the best part of that town. Rates go up so they can’t afford that, so they need to recalibrate what they are going to buy,” he said.

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4 thoughts on “Housing market chills as mortgage rates, prices scare buyers

  1. A complicated situation with many factors, but if the mortgage moving from 3 to 6 percent prices you out of the house, you probably couldn’t afford it in the 1st place.

    1. That might be a bit of an overstatement. It depends on whether you are barely able to scrape together 20% down or if you have 50% down. I’m older, so if I move I will have 50%-75% to put down. So the interest rate has less of an impact for me. But if you’re financing 80%+, then the rate will absolutely make a big difference. I’m guessing, Chuck, that you are also well aware that the rule of thumb on how much house you can afford as described by lenders and agents is stupidly high. When I bought my second home in Indy, we were told we could borrow at a level that would triple our former mortgage payment. We knew that made no sense.

  2. Both of you made good comments and it is true that the amount of the down payment plays a big role in the affordability of the loan. However, may I shed some perspective on the current trend? Just as most of us are accustomed to paying way less for a gallon of gasoline than what is being charged now, we have also been conditioned by an extended period of time with low interest rates. These rates have been artificially low as the fed was trying to boost the economy and encourage spending. But if one looks back over the last 30 years, it would be clear from the data that the 30-year average mortgage rate is in the 7-7.5% range. I am a licensed broker with 30 years of experience in brokerage, investing, and managing property also. The problem now is that we are all spoiled rotten. A rate in the 5-6% range is not a bad rate but to most of the public, perception is reality. People should only do what they are comfortable with and spend what they can afford. But the fear that many folks have may be holding them back from making an informed and intelligent decision. I have bought several properties in the last 6 months and I paid more than what I wanted to do, but realized they are not going to get any less expensive – a myth or hope that some are banking on. Why is this perhaps a bad strategy? Because rents are not getting any cheaper, and you have more control owning than you do renting so be smart when playing the odds.

  3. Renting in Indiana sucks on purpose caused by laws passed by the landlord owned State legislature.
    1400 renters got water utility cut off notices because their absentee landlord didn’t pay the utility company the money collected to pay utilities from the renters in the rent payments.
    Renters have no rights in Indiana.