It is getting more expensive by the day to buy a house in America. Mortgage rates, historically low during most of the pandemic, are rising faster than in decades†
Put the two trends together and the imminent monthly mortgage payment for home buyers – a combination of principal and interest payments – is Real to take off:
According to the Mortgage Bankers Association, the median monthly payment for a new mortgage application in America rose more than 8 percent in just one month in February. That spike, shown above, points to an entirely new and unpredictable phase in what has been an overwhelming housing market.
In normal times, rising mortgage rates should help cool home prices. For the time being, however, it is possible that both measures will continue to calculate forward together, making it increasingly expensive to buy a home.
“There are so many strange things going on right now,” said Edward Seiler, associate vice president for housing economics at the Mortgage Bankers Association.
Understanding inflation in the US
It’s been 40 years since rates rose like this, along with a similar rise in house prices and high inflation. This time, the United States also has a serious housing shortage. And then there’s a new and uncertain dynamic: the sudden emergence of working from home, which has the potential to change what home buyers want and where they live.
“Nobody really knows what’s going to happen in the coming year,” said Mr. Seiler. This makes it difficult to predict when rates will act as a brake on rising prices.
Among a subset of mortgages backed by Freddie Mac, the monthly payment made by new buyers since the start of the pandemic has risen more than at any time in the past 25 years.
“That shows you the composite artifact of both rising interest rates and rising house prices,” said Sam Khater, chief economist at Freddie Mac. “We’ve had episodes of each in the past — but not as intense for either.”
At the start of the pandemic, falling mortgage rates enabled rising house prices – and offset them in monthly mortgage payments that remained stable for much of 2020. But with both measures increasing at the same time, monthly payments can escalate quickly, as in Sun Belt. and Mountain West states in particular.
Rates and house prices could continue to rise together for a number of reasons related to today’s high inflation. Rents are also rising now. That means the alternative to buying isn’t particularly attractive either. And in a time of high inflation, buying a home — and locking in today’s monthly payment for the next 30 years — is a great way to protect yourself from rising rents. In a context of 8 percent annual inflation, a 4.5 percent mortgage rate is actually a good deal.
For potential home buyers, “the alternative is both the rental option and the option where do you put your money?” said Arpit Gupta, a professor at NYU’s Stern School of Business. During periods of high inflation in the past, real estate has often been a better asset than other types of investments such as stocks (and better than leaving money in a checking or savings account).
Mr Gupta warns that rising rates could also make rental inflation worse as it pushes more people from the buyer’s market to the rental market, increasing demand there. In a sort of feedback loop, those ever-rising rents will also continue to put pressure on people who can afford to buy instead, even at higher interest rates.
So far, with mortgage rates rising half a point in the past four weeks, there’s little evidence that the market is calming down. In the past month, the share of owner-occupied homes that accepted an offer within a week reached a record, and last week list prices still setting new highlights†
Frequently asked questions about inflation
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual price change for everyday goods and services such as food, furniture, clothing, transportation, and toys.
“I don’t see much concern from my buyers,” said Beth Abeita, a Redfin real estate agent in Austin, Texas, where home prices rose as much as 30 percent in 2021. If anything, she said, she hears people worrying about the stock market, not mortgage rates — both because they now believe housing will be a better investment, as Mr. Gupta suggested, and because lower stock prices mean some buyers will have less money for a down payment.
It makes sense to bid for scarce housing now before it gets worse, Ms Abeita said.
“Interests aren’t going to go up for you anymore,” she said of those who have secured a home. “You are not going to pay even higher prices in three months. What you think you are overpaying for today is a deal in a few months because everything is growing so fast.
That touches on another reason why demand isn’t likely to cool just yet: the expectation of higher rates could spark a wave of buyers now trying to get ahead.
In this environment, buyers are also still competing for a historically tight supply. The inventory of homes for sale has hit record lows, with more owners holding onto homes as rental investments rather than selling them, and potential sellers fearing their next home won’t come on the market. Higher rates are also likely to deter some sellers, as they may choose to stay in a home that was recently refinanced at rock bottom prices rather than move to a new home at twice the interest rate.
To compound all of these challenges, underbuild has been going on in the US for years, particularly in expensive coastal subways where housing is in high demand.
“Higher rates don’t solve all of that,” said Mr. Khater. “It might balance the market a little more — modestly more balanced — but it doesn’t solve the fundamental problem.”
In other words, higher rates do not lead to more supply. If anything, rising interest rates across the economy will also increase borrowing costs for homebuilders, on top of all their other pandemic problems.
