Higher rates deterring some homebuyers
- Author: William Asher
- Posted: 2024-09-02
A recent survey showed that the 30-year fixed mortgage rate has increased to 5.54%, up from 2.78% just a year ago. This dramatic increase leaves home buyers with unwelcome options. These buyers have to pay hundreds of dollars more for the mortgage, buy a smaller home, choose a less desirable neighborhood, or wait to buy a new home until rates fall. But all signals indicate that the Fed will continue to raise rates in the near future.
In the short term, however, high mortgage rates may not deter buyers. They can only slow the housing market down by limiting the pool of buyers. But long term, high mortgage rates could mean higher mortgage payments, which would lower a buyer's purchasing power. While rates have risen steadily in recent years, the current housing market continues to favor sellers, and buyers are fighting for fewer homes. This can result in a bidding war, which could push the sale price higher than the asking price.
The drop in home sales reflects not only the high inflation rate but also the rising interest rates. Mortgage rates have increased from 2.75% in mid-May to as much as 5.25% in some areas. This is consistent with reports that homebuilding activity has been slowing down nationwide. These factors are contributing to the lower number of new homes, as supply and labor shortages and the lack of inexpensive lots have impacted homebuyer demand.
However, mortgage rates have historically been higher than current levels. The housing market has done better when rates were higher. Between 1981 and 1999, rates averaged 7.2 percent. Between 1980 and 1990, they averaged 12.5 percent. And there has been an era when mortgage rates were even higher. In 1981, mortgage rates were 18 percent and then dipped to less than ten percent by the end of the decade. This trend can continue for years to come.
The Federal Reserve has responded to the crisis by aggressively raising short-term interest rates. This policy essentially increased the money supply by buying bonds and other debt. The result was a period of cheap credit. Mortgage rates reached below five percent in 2013, and they were at historic lows until the end of the year. Mortgage rates were still well below the four-percent mark in 2016, and sales of previously owned homes dropped for five consecutive months.
Those same rising rates are deterring buyers. The spread between two-year Treasuries and ten-year Treasuries fell to negative territory this week, making homes that were within their price range out of reach for many consumers. While prices have continued to rise, a significant number of Americans are still unable to afford to buy homes that meet their needs. One example is Kyle Tomak, who was looking for a home for his in-laws in the Denver suburbs. But mortgage rates had already pushed the price range out of his reach.
