Rising mortgage rates are forcing US buyers to stretch their budgets

According to the latest industry data, Americans are stretching their budgets to buy new homes, scrambling to close deals quickly to avoid higher mortgage financing costs later.

Lenders and real estate agents said buyers’ willingness to spend more of their income on mortgage payments was supporting house prices just as rising rates were eroding affordability.

Determined consumers are leading a “very, very aggressive and rapidly changing spring market as we enter home buying season,” said Matt Vernon, head of retail lending at Bank of America.

He said higher rate expectations are “pushing these buyers into the market” and they are “becoming more aggressive in their pursuit of homeownership from a time perspective.”

Mortgage rates hit their highest levels in more than a decade, according to the latest Freddie Mac survey released Thursday. The average for a 30-year fixed-rate mortgage reached 5.27%, compared to 2.96% a year ago.

Rising interest rates generally lead to lower mortgage applications, but applications for new mortgages rose 4% from the previous week, according to data released Wednesday by the Mortgage Bankers Association.

The MBA’s latest Affordability Index highlighted the resolve of homebuyers. The average payment for new mortgage applications in March was 42% of an average American’s income, up from 34% a year earlier, according to an FT analysis by MBA and federal data.

“If we can get there now, we want to get there now,” said Brittany Majors, a 37-year-old New York resident who said she’s been outbid 10 times on suburban New Jersey homes in the past six months. .

Line graph of average monthly payment, in dollars showing that average payments on new mortgages have increased by 38% since January 2019

Another sign of home buying demand comes in the form of an increase in mortgage pre-approvals, which are the first step for buyers who need to take out a loan to finance their purchase. The process requires borrowers to undergo a survey of their finances in exchange for a letter they can show sellers to prove they are qualified to buy a home.

Increasingly, potential buyers are seeking approval before they have identified a home to buy. Maxwell, a mortgage software provider that works with more than 300 U.S. lenders, said pre-approvals without an associated address reached 80% of all inquiries in March, compared to 50-60% typically, in its network.

“These are the months when all these people should be under contract, and you just don’t see it,” Maxwell chief executive John Paasonen said.

According to BofA research released last week, two-thirds of homebuyers in the market say they are willing to make an offer on a home immediately or within three days of viewing a home.

Additionally, more than 70% of buyers said they are willing to move into homes in less desirable neighborhoods with less space to close a deal, and 56% are considering taking a second job. to earn extra income. their homeownership goals, according to the report.

The national median price for existing single-family homes was $368,200 in the first quarter, up 15.7% year on year, the National Association of Realtors reported this week.

Majors, the potential New Jersey buyer, said she’s been in constant communication with her loan officer as rates rise. “I ask him, ‘What is my drill room? What is my ceiling?’ then we pick a number based on that,” she said.

So far, she’s increased her budget by $150,000 and removed an extra bathroom from her list of requirements for a home in the suburbs.

“I don’t know what to do because I know financially it’s probably not smart for me to go any further than I have,” she said.

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