Rising mortgage rates add to the challenge of buying a home

Home prices remain high and rising borrowing costs add to the challenge of buying a home ahead of the traditional spring selling season.

The pace of house price increases could slow this year from double-digit percentages to single digits, said Danielle Hale, chief economist for Realtor.com. But prices are expected to rise further and conditions will likely continue to favor sellers.

“Prices will continue to grow, but at a slower pace,” she said, and one of the main reasons is that mortgage rates are expected to rise. “Higher mortgage rates reduce the affordability of anyone taking out a mortgage,” which the majority of homebuyers do, she said.

The average rate on a 30-year fixed-rate mortgage recently hit 3.92%, the highest rate since May 2019, according to mortgage finance giant Freddie Mac. The rate fell to 3.89% this week. A year ago, the average rate was 2.81%. Freddie Mac’s weekly survey looks at loans used to buy homes, rather than borrowers refinancing loans they already have.

Mortgage rates are rising rapidly. The Mortgage Bankers Association predicts average rates will be just above 4% by year end – still low in historical terms, but above the 3% or lower that borrowers have seen. (The association includes refinance rates as well as purchases in its forecast.)

Why are rates rising? In response to higher inflation and a strong labor market, the Federal Reserve is expected to begin a series of hikes in its benchmark interest rate in March, indirectly contributing to higher mortgage rates. (In general, mortgage rates are tied to 10-year Treasury bonds, which are influenced by various factors, including the outlook for inflation.) Consumer price increases have recently reached levels not seen in 40 years, mainly due to the constraints of the pandemic.

The average borrower with a 20% down payment would pay about $100 more per month on a new mortgage than one taken out late last year due to rising rates and house prices, said Andy Walden, vice president of corporate research strategy at Black Knight, a mortgage data provider.

Rates are rising as strong demand for homes, coupled with a tight supply of properties for sale, has pushed home prices higher. The typical sale price for a previously owned home in 2021 was just under $347,000, according to the National Association of Realtors — an increase of nearly 17% from 2020.

Buyers should still expect a competitive real estate market in the spring, Hale said. Some potential buyers who were on the fence could move quickly to lock in mortgage rates before they rise further. “It gives buyers some urgency to close as soon as possible,” she said.

But some buyers — especially first-time buyers — may decide to wait until even higher rates help cool prices later in the year. According to the National Association of Realtors, the largest share of homebuyers are millennials between the ages of 21 and 40, many of whom are first-time buyers.

“The spring season will be very interesting,” said Lawrence Yun, chief economist of the Realtors Association.

Ultimately, the housing market needs more inventory, Yun said. “We need a supply of empty houses.” Builders have struggled to keep newly built homes affordable, including high lumber prices and difficulty finding construction workers.

Buyers may need to consider more affordable homes in less urban areas, Yun said. This may depend on the ability of the owners to be able to continue working remotely.

One variable in the number of homes for sale is the end of mortgage forbearance granted during the pandemic. Many landlords were able to resume their payments after their payment break expired. But some may not be able to, forcing them to sell their homes, said Michael Fratantoni, chief economist of the Mortgage Bankers Association. The number of borrowers in forbearance has decreased, reaching around 705,000 homeowners at the end of 2021.

Here are some questions and answers about mortgage rates and the housing market:

Q: As mortgage rates rise, should I consider an adjustable rate mortgage?

A: Adjustable rate mortgages, or ARMs, offer a fixed interest rate for a certain period of time before changing to a variable rate. The loans got a bad rap during the 2008 housing crisis because some lenders gave them to unqualified buyers who couldn’t afford higher payments when interest rates soared. Continued skepticism about adjustable loans, combined with low fixed-rate mortgage rates in recent years, has kept ARMs out of favour, Black Knight’s Walden said.

ARMs make up about 4% of the mortgage market, up from more than a third in 2005, Fratantoni of the Mortgage Bankers Association said.

Now, however, some homebuyers may find ARMs attractive again, said Melissa Cohn, regional vice president of William Raveis Mortgage, which focuses on lending in the Northeast and Florida. The loans now offer more protections, she said, such as longer periods before their rates can increase — five to 10 years — and caps on maximum rate increases.

“It’s time to switch gears,” she said. Recently, she says, she helped clients get a 30-year ARM that offered a fixed rate of 3% for 10 years.

Q: What is a typical down payment for buying a home?

A: Rising house prices in recent years have made it harder to save a down payment, but the amount of money needed upfront is often less than the traditional 20% rule of thumb. In 2021, the typical down payment for repeat buyers was 17% of the purchase price, according to the National Association of Realtors. For first-time buyers, it was only 7%. Some programs allow down payments as low as 3%.

Q: Is a federal tax credit available to help first-time home buyers?

A: The federal first-time homebuyer’s credit, offered after the housing crisis, expired in 2010. Legislation was introduced in Congress in April to provide an expanded credit, under which eligible homebuyers could get a federal tax credit of up to 10% of their income. the purchase price of the home — up to a maximum of $15,000. The bill’s prospects are uncertain. Some states offer their own tax credits or other assistance to first-time buyers. Check with your state’s housing finance agency.

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