High real estate interest cooling due to high mortgage interest | News Sun

For those still looking to buy a home, the search is becoming more expensive than it has been for some time.

Yes, home prices continue to soar as buyers battle for tight inventory, engaging in bidding wars to try to get into the few homes available on the market. Inflation has also driven up the costs of building materials and labor, making new construction even more expensive.

But now buyers are grappling with an additional factor that hasn’t been the case for some time: rapidly rising interest rates.

In an effort to rein in rising inflation, the Fed raised its base interest rate more rapidly, a move that had a direct impact on mortgage costs, combining an increase in asking prices and an increase borrowing costs.

The final result ? Housing is arguably the least affordable in over a decade.

Home prices have been rising steadily for years as sellers compete for low inventory. This has made housing less affordable for some time now – prices rose 8% year-on-year last year – and buyers and sellers are well aware of this.

Part of the reason prices may have skyrocketed is that borrowing has been so cheap. Even though asking prices have ballooned, even low-income buyers could make it work with bargain-priced interest rates.

Now, not so much.

In the United States, average rates for a 30-year mortgage have more than doubled in the past 18 months and are now at their highest level since before the epic real estate crash when the subprime mortgage bubble burst in 2008.

According to economic data from the Federal Reserve, mortgage rates for a 30-year loan averaged 5.7% for the week of June 30. The last time rates were this high was November 26, 2008, when interest rates averaged 5.97% before plunging as the market tanked.

Mortgage rates were 3.22% at the start of 2022 and hit a 50-year low of just 2.65% in January 2021.

This sudden spike in interest rates had an almost immediate impact on homebuyers.

Larry Doyle, President of Campbell & Fetter Bank, presented some sample numbers for illustration.

Doyle calculated the numbers for a $300,000 home — a price chosen because it’s the upper end for homes built as part of Kendallville’s new Noble Creek subdivision — by considering a mortgage with a typical 20% down payment.

“I looked at $240,000 on a 30-year amortization at 3.25% because at the time, say, the first of the year or something, that was in the range where the rate over 30 years. The principal and interest payment on that $240,000 at 3.25% is $1,044 (per month). If you say, today, some sort of going rate on a 30-year mortgage, if you said 5.5%, you’d be close – maybe on any given day a hair upon a hair below, close enough for this chat – $1,362.

“That’s an increase of $318. Same dollar amount. Same dollar amount borrowed,” Doyle said.

Doyle said banks generally like borrowers to spend no more than 25% of their monthly gross income on those mortgage payments. So, this increase in costs, due only to rising interest rates, can significantly reduce someone’s purchasing power.

“With a $300 per month increase, everything else being the same, you either have to buy less house or have $1,200 more income per month to stay in that ratio,” Doyle said.

This 25% ratio only concerns the mortgage payment. Banks also look at borrowers’ other expenses — car loans, credit card debt, personal loans, student loans, child support, and more. – and try to keep that load below around 40% overall.

And those numbers above are if a buyer can pull together a 20% down payment, a sizeable order for many first-time buyers who are going to struggle to cash in tens of thousands of dollars before going to market, said Doyle.

In Noble County, where the median household income is just under $60,000 a year, 25% of their gross monthly income would be $1,250, which makes this house $300,000 with a down payment. unaffordable $1,362 mortgage.

Since typical northeast Indiana household incomes fall within the Noble County range, buyers in the area may soon find that many homes over $200,000 are out of their price range.

This is already starting to happen, said Mark Bock, chief broker for Mike Thomas Real Estate in Angola and LaGrange.

“A lot of buyers — especially low-end buyers, first-time home buyers, or low-cost buyers — are in trouble because some of them are just being pushed out of the market,” Bock said. “It becomes a problem because they usually buy the houses where people are moving from. With this slowdown, it affects the intermediate level. That’s what we’re seeing right now, it’s a slowdown of that.

The rise in borrowing costs is pretty obvious, as Bock said he saw something happen in the market that hasn’t happened in years:

“We had nine price reductions (recently) and we haven’t seen any price reductions in our market for several years. That usually didn’t happen,” Bock said. “Sellers who were aggressive or priced aggressively walked away from the market.”

Given that the shock in the bond market has been happening for about the past six months, it’s too early to tell how big an impact it will have. But in the short term, this is already playing a role and Bock is confident enough to say that year-on-year house price growth is likely to stagnate.

“We have reached a period of stabilization. So I don’t think we’ll have the appreciation, the 8% that we had last year. We’re not going to have that this year,” Bock said. “Home appreciation or inflation has stagnated, which is probably a good thing for buyers.”

This does not mean that the market will suddenly collapse. Bock notes that the country still has a housing deficit of more than 5 million homes.

Demand still greatly exceeds supply, but a rise in the cost of borrowing could help reduce the imbalance.

“I think people want what they want, and as long as interest rates and housing prices remain affordable enough for individual borrowers, we will continue to see activity locally in the housing market, especially especially where we have a shortage of available accommodation. New builds seem to remain in high demand, and our community is blessed with many talented builders. As a local portfolio lender who is driving ad hoc construction loan closings, these applications remain very strong in our outstanding loans,” said Scott Gruner, President of First Federal Savings Bank in Angola.

Buyers are being hit by sticker shock right now, but real estate agents and lenders have noted two things – first, that markets are cyclical, so ups and downs are happening and, second, even despite recent increases , borrowing is still cheap relative to where rates have been historically.

“We have just experienced a historically low long-term interest rate environment. For this reason, many borrowers, especially younger customers, have never seen interest rates at these current levels, although they remain historically low,” Gruner said. “When I started in banking in 1998, interest rates were around 6% and I personally haven’t seen them get to that level, until now. as they start to approach 6% again So I really think it’s a matter of perspective Our older borrowers are thinking about the interest rates of the 1980s when they were, say, 15 %, and still think those rates are a bargain today.

In the early 1970s, mortgage rates were around 7.5%, before soaring during a period of high inflation under President Jimmy Carter, eventually reaching an all-time high of 18.44% in October 1981.

Mortgage rates fell, peaked again at around 14.5% in 1984, fell to around 9% in early 1987, but rose to around 11% by the end of that year.

Rates fell to 7% in 1993, then had a final major spike to over 9% at the end of 1994.

Since then, mortgage rates have been on a long-term decline with a few spikes up and down over the years, but have been steadily falling for the past 30 or so years. This year’s spike is arguably the biggest spike the loan market has seen in these three decades.

Since first-time home buyers are typically in their 20s or 30s, what’s “high” for them is actually lower than what was “normal” for their parents and grandparents.

“When I put this on the market in 1978, interest rates were 17.5%,” Bock said. “It could be much worse. More than 50% of real estate agents active today have never experienced a market change. I’ve been through four.

Yet short-term increases in interest rates will inevitably cool the housing market. And that’s kind of the point, Doyle said, as the Fed raises interest rates to make money more expensive, calm demand and help slow or stop inflation rocking the US economy. .

Housing affordability is also going to take a short-term hit until time passes, incomes respond, and the high interest rates people now see become the new normal, Doyle said.

“There is no doubt that the price of existing or new homes exceeds people’s income. There is no doubt about it,” he said.

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