Since home prices shot into the stratosphere, many first-time buyers have prayed for them to fall so that they could afford to become homeowners. Their wishes appear to have been granted—and yet, they’re caught in a paradox: Even as prices have begun to dip, the cost of purchasing a home has risen. A lot.
The reason for the contradiction: soaring mortgage interest rates.
Most folks are still laser-focused on a property’s price tag. In fact, this kind of list price obsession is deeply ingrained in the American psyche. But, of course, purchasing a home is very different from buying products from a brick-and-mortar store or shopping online. Unless home shoppers are buying with all cash, they will be taking out a long-term loan to fund their purchase. And there’s a hefty cost to borrow that money—which increases when mortgage rates go up.
Nationally, the median mortgage payment is now about 77% higher* than a year ago. The bulk of that increase is due to the higher rates, which shot up from the low 3% range to hover around 7% for 30-year fixed-rate loans. And that has entirely upended the affordability equation.
“Interest rates absolutely matter,” says Realtor.com® Senior Economist George Ratiu. “The mortgage rate can make or break someone’s ability to purchase a home almost regardless of price.”
For those payments to return to where they were just one year ago, home prices would need to plummet by 45% (assuming rates stay where they are). Let that sink in for a moment. If mortgage rates increased to 8%, prices would have to fall by about 50% to get back to around last year’s payment.
Mortgage rates make that much of a difference.
“Prices would have to drop significantly for homebuyers to feel like they’re actually getting a bargain,” says Ratiu. “If we had stayed at a roughly 3% interest rate, falling prices could have given people a chance to snag a bargain or something that’s actually more affordable. But with rates … not likely to return to those 3% levels anytime soon, even a 10% decline in prices is not going to offer much of a bargain.”
Home prices are not expected to plummet
The chances that home prices will fall by 45% are beyond slim. Prices have come down a little from their peaks over the spring and summer, but they are still up annually. Most real estate experts are predicting only about a 10% decline nationally, although the exact amount is expected to vary greatly throughout the country.
Realtor.com
follow @claretrap on Twitter.
