Rising mortgage rates are making homes less affordable and starting to slow the housing market

As mortgage interest rates have jumped higher this year, mortgage banker Patrick Lopez has seen a common problem among homebuyers getting pre-approved for mortgages — a strategy real estate professionals recommend in a competitive market.

Pre-approval allows buyers to show sellers that they have the funds to pay quickly. The problem is that mortgage rates have risen rapidly and eroded purchasing power. For example, someone who was pre-approved for a $200,000 loan in March, when the average rate was around 4%, might have recently made a winning bid. But now that mortgage rates are above 5%, the buyer is only approved for a loan of $180,000.

Meanwhile, prices are moving in the opposite direction. Homes that would have cost $200,000 are now $220,000.

“I would say maybe 50% of people are really struggling,” said Lopez of Quaint Oak Mortgage in Allentown. Higher rates combined with higher home prices, he said, “just beat the buyers up.”

Across the country, they are paying hundreds of dollars more per month than if they had bought at the start of the year, according to a LendingTree analysis released this month. On average, they pay $259 more per month, which means $3,100 more per year.

» READ MORE: US Mortgage Rates Rise; 30 years at 5.27%, the highest since 2009

Home prices are not rising as fast as they used to, but as prices and interest rates continue to rise, demand will subside as more buyers are forced out of the market. That’s bad news for some shoppers, but good news for those with the cash to stick around.

“We’ll probably see the housing market cool down a bit from the craziness we’ve had in 2020 and 2021,” said Jacob Channel, senior economics analyst at LendingTree.

READ MORE: Fed hikes rates half a percentage point to fight inflation

That means prices will rise more slowly, homes won’t sell as quickly, and fewer homes will sell. But even if activity is starting to slow compared to the past two years, he said, “that doesn’t mean things are going to be completely cooled off.”

“The housing market is still relatively warm,” he said. The bidding wars are still ongoing, and even with higher mortgage rates slowing home price growth, Channel doesn’t expect dramatic price drops any time soon.

Record rates over the past two years have prompted many people to buy homes and many homeowners to refinance their loans to lower their monthly payments. Those landlords who have fixed rates will not pay more as the rates increase.

But that’s another story for those looking to buy. now. The average 30-year fixed mortgage rate was 5.3% in the second week of May, according to government-backed mortgage buyer Freddie Mac. This is the highest since 2009. Six months ago, mortgage rates were around 3%.

“It’s a huge, huge difference,” Lopez said.

Quaint Oak Mortgage pre-approves an average of 15 buyers per week. Typically, these would result in five to 10 sales deals. Now that number is three to five. Shoppers “just can’t find anything” in their price range, he said.

“There are so many people who have given up,” Lopez said. “I just said, ‘I’m out.'”

Buyers who find homes will pay more per month. Mortgage holders who bought a home in New Jersey last month are paying an average of $325 more per month than if the home had been purchased in January, according to LendingTree. Pennsylvania mortgage holders pay an average of $246 more per month.

» READ MORE: Low mortgage rates help homebuyers as prices rise – if they can qualify (from 2020)

The average mortgage for New Jersey homeowners is around $380,000, according to LendingTree. The monthly payment for this sizeable loan went from $1,732 in January to $2,057 in April. In Pennsylvania, homeowners have average loans of $274,000. Monthly payments fell from $1,275 in January to $1,521 last month.

Many people don’t realize how much monthly payments can vary by lender, landlord and location, Channel said. According to LendingTree, New Jersey was among the top five states where monthly mortgage payments rose the most this year. The state has competitive housing markets, and because New Jersey can be an expensive place to live, many people have large mortgages.

“Overall, lenders are raising rates,” Channel said. “But it turns out that in some areas, like New Jersey, for example, the rates are increasing at a slightly higher rate. And when you add that to already high loan amounts, you’re going to end up with more expensive loans. »

So far, Philadelphia has been relatively resilient to market changes. The rate of bidding wars in the region rose slightly this spring, while the national rate fell slightly, said Daryl Fairweather, chief economist at Redfin.

One reason could be Philadelphia’s reputation as an affordable city compared to many of its neighbors, she said. When high home prices push city residents out of the market, buyers moving out of New York and other more expensive places step in.

» READ MORE: High house prices could subside due to rising mortgage rates

In a notable nationwide development, sellers appear to be retreating as much as buyers as mortgage rates rise, Fairweather said.

In the short term, many homeowners who refinanced and got lower monthly mortgage payments when interest rates were at record highs won’t want to sell their homes just to have to buy again at higher rates. In most cases, the choice to sell will only make sense for owners moving to more affordable markets or downsizing, she said.

» READ MORE: Black and low-income homeowners missed out on refinancing boom spurred by low interest rates

Fewer homes will come on the market, but more homes will be for sale as demand cools and properties take longer to sell.

“All of this means we’re going to see a drop in sales,” Fairweather said, “because neither buyers nor sellers want to participate in the market as much as they used to.”

Channel said it hoped that by the end of 2022 and into next year housing supply would rise from record highs. But this will not be enough to meet the needs.

Last year, economists predicted that mortgage interest rates would not exceed 4% in 2022. Then came rising inflation, Russia’s war on Ukraine, pandemic shutdowns in China and long-lasting supply chain disruptions and labor shortages that have conspired to drive up mortgage rates.

Economists expect rates to rise at least a little further before the end of the year. During the first week of May, the Mortgage Bankers Association said it expected mortgage rates to “plateau” somewhere around current levels.

“The chances of them getting back to where they were in 2021 are pretty, pretty small,” Channel said. “I don’t think people should hold their breath for rates below 4% over the next few years.”

About Daisy Rawson

Check Also

Amir Mehr ’92 Honored with Distinguished Alumni Award

By Lea Hart Amir Mehr’s time at North Carolina State University was not just a …