As Chris Varley locked in a 5.5% mortgage interest rate in April for three months, he knew the clock was ticking. His family stretched the house hunt from Kittery, Maine, to Marion, Massachusetts, to find a suitable home to move to from Cleveland, Ohio, so they can be near family and friends.
The clock ran out on the lower mortgage interest rate in July and now the family is looking at interest rates of more than 7%.
“It’s really, a really weak inventory,” Varley said. “People are holding on to their homes.”
The average mortgage rate in the country is at almost 8%, the highest level in 20 years. That has homeowners holding on to their low interest rates they acquired or refinanced when rates were low.
More than 9 of every 10 U.S. homeowners with mortgages have an interest rate below 6%, according to real estate websiteRedfin. Which is why many homeowners don’t feel the need to sell, creating an inventory crunch.
The Federal Reserve has raised rates by 5.25 percentage points since March 2022 and the increases are unlikely to stop until inflation cools to a 2% level, Fed chairman Jerome Powell has indicated. That means the housing market is stuck in a standstill, with buyers and sellers holding off.
“Anyone who doesn't have to borrow at these rates will delay if possible, which will put both new and existing home markets on ice,” said Kent Gardner, retired chief economist at Center for Governmental Research. “That has ripple effects for the residential construction sector and all of the other components of the economy that depend on construction.”
The real estate market is slow, said Carolyn Morganbesser, assistant vice president of mortgage originations at Affinity Federal Credit Union. Rising interest rates deter current homeowners from selling their homes and purchasing new ones, she said.
“If you owned a home and had a low interest rate, why would you sell and purchase at a substantially higher rate?” Morganbesser asked.
Higher interest rates affect the qualifying power for not only first-time home buyers but second and third-time buyers as well. Take for example a buyer with a good credit score buying a home for $400,000 with 3% down with a loan amount of $388,000. On a 30-year fixed-rate loan two years ago, the rate would have been approximately 3% with an annual percentage rate of 3.12%. The monthly principal and interest payment would be $1,635.82. On the mortgage today, the interest rate would be approximately 7.75% with an annual percentage rate of 7.91%. The monthly principal and interest payment would be $2,779.68. The difference between payments is $1,143.86 per month.
For first-time home buyers, the extra money is a burden. Some can't earn enough income to qualify. Even if they do qualify, they don’t want to take on that high of a payment, Morganbesser said.
For the Varley family, the interest rates are not as much of a concern as they have equity from another home. The borrowed amount won’t be as much as they have money from the sale of their Cleveland home to put down.
Yet Chris Varley is concerned about rising interest rates along with the impact on people willing to put their homes up for sale. So far, he’s seen mostly corporate relocation and estate homes on the market along with some new construction that haven’t appealed to the family.
For now, they are renting a furnished home on the south shore of Massachusetts with their belongings in storage, hoping to buy a home in this era of high interest rates and low inventory.
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