Credit Sesame Street’s investigation indicates that increasing inflation, which leads to higher loan rates, is affecting Americans right where they live — literally. Interest rates are rising as a result of rising prices, and increased mortgage rates are already having an influence on the housing market.
People in the real estate industry frequently refer to a “buyer’s market” or a “seller’s market.” Increased mortgage rates result in neither. They are an economic force that both buyers and sellers are affected by.
A Significant Increase in Mortgage Rates
According to Freddie Mac, 30-year mortgage rates have increased by two full percentage points since the beginning of 2022. Rates on 15-year mortgages and adjustable-rate mortgages (ARMs) have also risen significantly this year.
Over the last few months, the trend of rising interest rates has quickened. For the seventh week in a row, 30-year rates have climbed, resulting in a total increase of 1.35 percent.
Increases in interest rates have an impact on home purchases
Mortgage rates have never been this high – or much higher – in the market before, but the rate of increase in 2022 will be particularly disruptive to home buyers’ plans.
Consider the experience of a typical house buyer who began looking for a property shortly before the latest seven-week round of mortgage rate hikes began.
The average sale price of a home in the United States is currently $477,900, according to the Federal Reserve Bank of St. Louis. With a 10% down payment and a 3.76 percent 30-year rate in early March, you could have bought a house for that price with a monthly principal and interest payment of $1,994.35.
With 30-year mortgage rates now at 5.11 percent, that same monthly payment with a 10% down payment would only get you a house worth $408,000 in just seven weeks. In conclusion,
In early March 2022, $1,994.25 per month bought a $477,900 property.
In late April 2022, $1,994.25 a month will buy a $408,000 property.
To put it another way, if you started looking for a home in early March and used a mortgage calculator to figure out what you could afford, you’d have to drop your target price by roughly $80,000 just seven weeks later to keep the same monthly payment.
Alternatively, a 10% down payment and a 5.11 percent 30-year mortgage would result in a monthly principle and interest payment of $2,337.92 for that same average-priced home of $477,900.
In just seven weeks, your anticipated monthly payment would have increased by 17.2 percent – a staggering rate of inflation for what is likely to be your highest monthly expense.
Increases in Interest Rates Make a lose-lose scenario
It’s simple to understand how rapidly rising mortgage rates can cause havoc with home purchasers’ plans. Not only is the cost of purchasing a home increasing, but mortgage rates are changing at such a rapid pace that it would be difficult to look for a home. It’s difficult to know which houses to look at when your desired price is a shifting target.
While rising borrowing rates are clearly detrimental to buyers, they can also be detrimental to sellers.
As mortgage interest rates climb, less of what purchasers pay goes toward the purchase price since interest consumes a larger portion of each payment. This puts downward pressure on pricing and dampens demand for homes.
According to a poll conducted by the Mortgage Bankers Association, demand for buy mortgages fell by 3% in a week and by 14% over the previous year during the week ending April 15, 2022.
In short, both buying and selling a home is becoming more difficult. Even those who aren’t planning to sell their property are affected by rising interest rates.
Higher interest rates limit refinancing options. According to the Mortgage Bankers Association, the amount of refinance mortgages has dropped even faster than the volume of buy mortgages.
The amount of refinancing mortgages fell 8% last week, and was down 68 percent year over year.
Should ARMs Be Considered by Consumers?
They do so at their own risk.
Another interesting factoid from the Mortgage Bankers Association survey: ARMs (adjustable rate mortgages) have achieved their highest level as a percentage of overall mortgage volume since 2019.
On the surface, there are two reasons for the increasing interest in ARMs. For starters, ARM rates are cheaper than 30-year or 15-year fixed-rate mortgages. Second, they haven’t climbed as much as fixed rates this year.
However, if mortgage rates continue to rise, the short-term benefit of an adjustable rate loan may not be worth the long-term expense.
ARMs have a low beginning rate that is then modified to market rates. People who have ARMs may come to regret not locking in a fixed rate if interest rates continue to rise.
Not only might their mortgage payments go up, but ARM owners also have to cope with the risk of their payments fluctuating over time. This can make creating a dependable home budget and long-term financial plans extremely challenging.
Renting isn’t cheap either
With all of the risks that rising interest rates pose to house purchasers, you may believe that renting is the best option for the time being.
However, this is becoming increasingly costly
The Federal Reserve Bank of New York conducts a housing survey as part of its annual Survey of Consumer Expectations, which assesses expectations for the coming year.
According to this survey, consumers expect rents to rise by 11.5 percent in the coming year. The average predicted rent increase was only 6.6 percent a year ago, suggesting consumers expect rent hikes to pick up speed.
Because housing is a necessary expense, many consumers may find it difficult to avoid increasing rents and mortgage rates. The best protection is to keep other types of debt to a minimum so that increased interest rates don’t bite into your budget any more than they have to.