High mortgage rates, prices are locking out homebuyers
NEW YORK — Kyle Tomcak was looking for a home for his in-laws in the suburbs around Denver, something priced close to $450,000.
Tomcak became dispirited as he lost out to investors fronting cash offers $100,000 over the asking price. Then mortgage rates ballooned, putting his price range out of reach.
“Your buying power is less even though your payments are the same,” he said.
Tomcak, 39 and a project manager for a commercial painting company from Aurora, Colorado, had hoped to lock in a monthly mortgage payment of $2,350. His mortgage consultant recommended dropping the maximum price he’d pay for a home to $300,000 then $200,000.
Tomcak has abandoned his search for now.
The Federal Reserve has aggressively raised shortterm interest rates to fight inflation, which in turn helps push rates higher for credit cards, auto loans and mortgages. 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 5.54% last week, according to mortgage buyer Freddie Mac; a year ago it was close to 2.78%. The sharp increase 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 Fed continuing to raise interest rates, promising little relief for potential buyers at least for the rest of the year.
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 $2,000a-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-squarefoot 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 historic 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.