Rising mortgage rates make homes less affordable and start to slow the housing market | Ezine Daddy

As mortgage rates have skyrocketed this year, mortgage banker Patrick Lopez has identified a common problem among homebuyers obtaining pre-approval on mortgages — a strategy real estate experts recommend in a competitive market.

With pre-approval, buyers can show sellers they have the means to move quickly. The problem is that mortgage rates have risen rapidly and purchasing power has eroded. For example, someone who was pre-approved for a $200,000 loan in March when the average interest rate was around 4% could have made a winning offer. But now that mortgage rates are above 5%, the buyer is only approved for a $180,000 loan.

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

“I would say maybe 50% of people really have problems,” said Lopez of Quaint Oak Mortgage in Allentown. Higher interest rates combined with higher home prices, he said, “only knocks buyers down.”

Across the country, they’re paying hundreds of dollars more a month than if they bought earlier in the year, according to a LendingTree analysis released this month. On average, they pay $259 more per month, which translates to $3,100 more per year.

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

House prices aren’t rising as fast as they used to, but as they and interest rates continue to rise, demand will ease as more buyers are squeezed out of the market. That’s bad news for some shoppers, but good news for those who have the cash to stay.

“Probably the real estate market will cool off a bit from the craziness that we’ve seen in 2020 and 2021,” said Jacob Channel, senior economic analyst at LendingTree.

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

This means that prices are rising more slowly, houses are not selling as quickly, and fewer people are selling. But even if activity is slowly slowing down compared to the last two years, he said: “It doesn’t mean things will completely cool down.”

“The housing market is still relatively hot,” he said. Bidding wars are still going on, and even if higher mortgage rates slow home price growth, Channel doesn’t anticipate dramatic price declines any time soon.

Record-low interest rates in recent years have prompted many people to buy homes and many homeowners to refinance their loans to lower their monthly payments. Those owners who have fixed rates don’t pay more when rates go up.

But it’s a different story for those looking to buy now. According to government-backed mortgage buyer Freddie Mac, the average interest rate on 30-year fixed-rate mortgages was 5.27% in the first week of May. That’s the highest level since 2009. Six months ago, mortgage rates were in the 3% range.

“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 ten sales contracts. Now that number is three through five. Buyers “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 houses pay more per month. According to LendingTree, mortgage holders who bought a home in New Jersey last month pay an average of $325 more per month than if the home was bought in January. Pennsylvania mortgageholders pay an average of $246 more per month.

» READ MORE: Low Mortgage Rates Help Homebuyers as Prices Soar – If They Can Qualify (2020 onwards)

According to LendingTree, the average homeowner mortgage in New Jersey is about $380,000. The monthly payment for a loan of this magnitude increased from $1,732 in January to $2,057 in April. In Pennsylvania, homeowners have average loans of $274,000. Monthly payments increased from $1,275 in January to $1,521 last month.

Many people don’t realize how much monthly payments can vary by lender, homeowner and location, Channel said. According to LendingTree, New Jersey was among the five states where monthly mortgage payments have increased 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.

“Across the board, lenders are raising rates,” Channel said. “But it just happens that in some areas, like New Jersey, interest rates go up a bit more. And when you add that to already large loan amounts, you end up with more expensive loans.”

Philadelphia has historically been relatively resilient to market shifts. The rate of bidding wars in the region rose slightly this spring while the national rate fell slightly, said Daryl Fairweather, Redfin’s chief economist.

One reason could be Philadelphia’s reputation as an affordable city compared to many of its neighbors, she said. When high housing costs drive city dwellers out of the market, buyers from New York City and other pricier places take their place.

» READ MORE: Hot home prices could cool amid rising mortgage rates

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

In the short term, many homeowners who refinanced and received lower monthly mortgage payments when interest rates were at record lows will not want to sell their homes only to have to buy them new at higher interest rates. For the most part, the decision to sell only makes sense for owners moving to more affordable markets or downsizing, she said.

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

Fewer homes will come onto the market, but more homes will come up 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 he was confident that housing supply would rise from record lows by the end of 2022 and into next year. But it will not be enough to meet the need.

Last year, economists forecast that mortgage rates would not exceed 4% in 2022. Then came rising inflation, Russia’s war on Ukraine, pandemic-related lockdowns in China, and ongoing supply chain disruptions and labor shortages that pushed up mortgage rates.

Economists assume that interest rates will rise at least a little further by the end of the year. In the first week of May, the Mortgage Bankers Association said it expects mortgage rates to “plateau” somewhere near current levels.

“The likelihood of them going back to where they were in 2021 is pretty, pretty slim,” Channel said. “I don’t think people should hold their breath with interest rates below 4% for the next few years.”

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