Prospective buyers in the U.S. have already faced tough times due to double-digit price rises and fierce competition for listings. They now face another challenge, as rising mortgage rates increase the affordability squeeze.
According to Freddie Mac, the average mortgage rate rose to 4.42% in the week ending March 24, 2015. This is a significant increase of more than one percentage point from January 2022 when rates hovered at 3.2%. This rate is the highest that homebuyers have seen in a year since March 2019.
Homebuyers face significant financial costs due to the higher rate. A fixed 30-year rate of 4.4% would mean that a median-priced house will cost $250 more per month than a buyer who bought in January, when the rate was 3.2%. Nadia Evangelou is senior economist and director of forecasting at the National Association of Realtors.
She said that the increase in housing prices is driving millions of buyers off the market. "Approximately 7.9 million households have been priced out since the start of the year due to higher mortgage rates," she wrote in an email to CBS MoneyWatch. She also stated that "2.5 million" of these households are millennials.
Many middle-class Americans are now unable to afford homeownership due to the rapid rise in home prices since the pandemic. They are competing against investors and high-income buyers for a small number of homes. Many people have wondered when prices will return to normal. However, so far there is no sign that prices are falling.
Realtor.com reported that the median listing price of U.S. homes increased by almost 13% to $392,000 in February compared to the previous year. Evangelou stated that only 40% of millennial renters can afford to purchase a starter home at today's rates compared with 53% one year ago.
Despite this, there are still some problems in the real-estate market. Experts say that the decline in the pending home sale index (which tracks existing contracts for home sales) of 4.1% in February is due to affordability concerns and a shortage of inventory. According to Realtor.com, the number of active listings fell by nearly 25% in February as compared to a year ago.
In a research note, Ian Shepherdson, Pantheon Macroeconomics' chief economist, stated that the trend in the number of home sales is correlated with the decline in mortgage demand. "The drop in mortgage demand has been rapid since the turn in the year and is nowhere near the bottom due to the continuing surge in mortgage rates," he said. "The housing market is cooling rapidly and sales are expected to fall by 20%-30% by mid-2018."
He said, "The writing's on the wall in big, sharp and clear letters."
Buyers looking to buy a home noticed that the price was higher while the #inflation rate increased. Not only did it take more from each paycheck but also drove mortgage rates higher. The net result, especially for first-time home buyers, was a decrease in their budgets and fewer options.
A triple-whammy is also facing buyers: Not only are borrowing and housing costs higher, but inflation has reached its highest point in over 40 years. High gas prices will cause an increase of $2,000 in household costs, which could impact their ability to purchase other goods and services.
"For buyers searching for a home the higher price came at a time when speeding #inflation took more from each paycheck and also drove mortgage rates higher," stated George Ratiu (senior economist at Realtor.com) on Twitter. "The net effect was a shrinking budget and fewer options, especially for first-time home buyers."
