Jul 09, 2023

Mortgage Rate Hike and Housing Market Challenges: An Overview

Unpack the implications of surging mortgage rates on homebuyers. Discover the changing dynamics of the housing market in the face of escalating rates.

The Mounting Pressure of Rising Mortgage Rates

Mortgage rates have experienced a slight uptick this week, placing additional strain on homebuyers contending with a scarce housing supply. This phenomenon marks the first instance in a year that the average U.S. home has sold above the asking price.

According to Freddie Mac's lead economist Sam Khater, the rise in rates can be attributed to a robust economy, consistent inflation, and a stringent stance from the Federal Reserve. "The combination of these high rates with the ongoing inventory scarcity continues to push many prospective homebuyers out of the market.”

The High Income Requirement for Homeownership

Navigating today's rates requires a robust income to afford a quality home. For example, purchasing a $500,000 property with a 10% down payment and securing a 30-year fixed mortgage at the current average rate of 6.81% would mean monthly payments of approximately $3,742 after accounting for property taxes and insurance, based on Zillow's estimates.

Given that lenders typically recommend housing costs not exceed 30% of gross income, a prospective homeowner would need an annual income of around $149,680 to afford a $500,000 house.

Trends in 30-Year and 15-Year Mortgage Rates

The average rate on a 30-year mortgage, the most favored home loan among U.S. buyers, rose this week, moving from 6.71% to 6.81%. This rate is significantly higher than the same time last year, when it averaged 5.83%.

Despite the Federal Reserve's temporary halt to federal funds rate hikes this month, it's unlikely this will become a norm. The Fed's June meeting minutes confirm their commitment to reining inflation back within the 2% range.

Economist Jiayi Xu from Realtor.com suggests, "While this may apply short-term upward pressure on interest rates, including mortgage rates, we expect a gradual decrease that could bring rates close to 6.0% by year's end."

High interest rates are also discouraging potential home sellers from entering the market. "Recent statistics show that nearly 82% of home shoppers reported feeling locked-in by their current low-rate mortgage, while around one in seven homeowners without a selling plan cited their current low rate as their reason for remaining on the sidelines."

Similarly, the average rate on a 15-year home loan also rose from 6.06% to 6.24% this week. This rate was considerably lower, at 4.45%, the same time last year.

Meanwhile, the median price of an existing home fell in May — to $396,100, a decrease of 3.1% compared to May of the previous year, according to the National Association of Realtors (NAR). This represents the largest year-over-year decline since December 2011.

Why First-Time Homebuyers Should Still Consider Purchasing

Despite the hike in mortgage rates, it's important to remember that becoming a homeowner still has numerous benefits, especially for first-time buyers.

Building Equity: Homeownership allows you to build equity over time, which can be a significant financial resource in the future.

Potential for Appreciation: While the real estate market has its ups and downs, over the long term, home values typically increase, presenting an opportunity for capital gains.

Stability and Control: Owning a home offers stability and control over your living environment, unlike renting. You can make any improvements you desire to make your home comfortable and reflective of your style.

Tax Benefits: Homeowners often qualify for tax deductions that aren't available to renters, such as the mortgage interest deduction.

As a prospective homebuyer, if you are comfortable with the projected monthly payments, now may still be a great time to buy.

Discover Down Payment Assistance and More with ReviewMyMortgage.com

Before making your decision, we encourage you to explore all available resources to make homeownership more affordable. Down payment assistance, bond programs, and grant programs can provide significant help to first-time homebuyers.

To discover what options may be available to you, create a Shopper Account with ReviewMyMortgage.com. Our platform is designed to help you understand and navigate the mortgage landscape better, equipping you with the tools you need to make the best decisions for your financial future. Start your homeownership journey with us today!

Brief Summary of Key Points: 

The uptick in mortgage rates combined with a housing inventory shortage is challenging potential homebuyers. With the average rate on a 30-year mortgage at 6.81%, purchasing a $500,000 property requires a substantial income. High rates also deter potential home sellers, exacerbating the housing supply issue. but as a first-time homebuyer, there is never a bad time to stop paying rent and start building equity. 

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