Surging mortgage rates are pricing millions out of buying a home

Published: March 26, 2022 8:46 PM EDT
Credit: WINK News.

The U.S. real estate market was already tough for prospective buyers, who have faced double-digit price increases and cutthroat competition for listed properties. Now they are facing another challenge as rising mortgage rates add to the affordability squeeze.

The average mortgage rate jumped to 4.42% for the week ended March 24, according to Freddie Mac. That’s more than a one percentage-point jump since January 2022, when rates were hovering at about 3.2%. The current rate is the highest homebuyers have seen since March 2019.

The higher rate translates into significant costs for homebuyers. For a median-priced home, a rate of 4.4% on a fixed 30-year mortgage would cost someone an additional $250 a month, compared with a purchaser who had bought in January when the rate was about 3.2%, according to Nadia Evangelou, senior economist and director of forecasting for the National Association of Realtors.

That jump in housing costs is pricing millions of potential buyers out of the market, she added. “Since the beginning of the year, about 7.9 million households have already been priced out due to higher mortgage rates,” she said in an email to CBS MoneyWatch, adding that “2.5 million of these households are millennials.”

The rapid increase in home prices during the pandemic has pushed the dream of homeownership beyond the means of many middle-class Americans, who increasingly are bidding against investors and higher-income buyers for a limited pool of homes. One question many have asked is when prices might come back to earth; so far, however, there are no signs prices are softening.

In February, the median listing price for U.S. homes jumped almost 13% to $392,000 compared with the previous year, Realtor.com said earlier this month. Only about 40% of renters who are millennials — whose generation is now the biggest buyers of homes — can afford to buy a starter home under today’s rates, compared with 53% a year earlier, Evangelou said.

Housing market cooling fast

Even so, there are some cracks emerging in the real estate market. For one, the pending home sales index, which tracks contracts signed for existing home sales, dipped 4.1% in February, which experts say is due to affordability concerns as well as a lack of inventory. The number of active listings dropped by almost 25% in February compared with a year earlier, according to Realtor.com.

“Pending home sales follow mortgage demand, which has been falling rapidly since the turn of the year, and is nowhere near bottom, given the continued surge in mortgage rates,” noted Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a research note. “The housing market is cooling very rapidly, and sales are set to fall by 20%-to-30% by mid-year.”

He added, “The writing is on the wall, in big, sharp, clear letters.”

Buyers are also facing a triple-whammy: Not only are housing and borrowing costs higher now, but inflation is at its highest level in four decades. The typical household is likely to face an additional $2,000 in costs this year due to high gas prices — money that will erode their ability to spend on other goods and services.

“For buyers looking for a home, the higher price came at the same time as speeding #inflation not only took more out of each paycheck, but also pushed mortgage rates higher,” said George Ratiu, senior economist at Realtor.com on Twitter. “The net effect, especially for first-time buyers, was a shrinking of their budgets & fewer options.”