Surging US mortgage rates are delivering a stark warning to would-be buyers: A brutal market is getting even more challenging.
Over the past two months, rates for 30-year mortgages have hurtled toward 8% by most measures. Affordability pressures are cutting into sales, with purchases of previously owned homes in September dropping to the lowest level since 2010, according to the National Association of Realtors.
It’s been a tough slog for house hunters since the start of the pandemic. After lockdowns started to lift, fierce competition fueled bidding wars and massive price increases. Then came rising rates that sidelined potential buyers, while owners also became more reluctant to sell. Inventory plunged, keeping prices elevated.
These days, the few buyers that are still hunting are fighting over scraps. And the move higher in rates is making it worse. Applications for purchase loans have fallen to the lowest level since 1995. Contracts to buy homes were canceled in September at the highest rate in almost a year, according to Redfin Corp. Even builders, who have benefited from the tight supply of resale homes, are becoming more concerned about the outlook.
“It’s not just the sticker shock or psychological effect of a round number like 8%” said Greg McBride, chief financial analyst at Bankrate. “But the rise in the mortgage rates from the lows at the end of 2021 have robbed would-be homebuyers of 40% of their borrowing power. That’s monumental and we just have never seen anything like this before.”
There is still a lot of pent-up demand for housing. And some people with money for down payments are trying to make it work. A measure of contracts to buy pre-owned homes unexpectedly increased in September from a month earlier, although it’s hovering near the lowest level on record. Sales of newly built properties rose in September.
But builders are expressing more caution. Nearly one-third of companies say that demand is slower than expected and causing concern, according to an October survey by real estate consulting firm Zonda. That’s up from 14% in August and 16% in September.
PulteGroup Inc. is among the builders that have offered to buy down mortgage rates for customers, an incentive that it’s called “powerful” in this environment. Still, higher rates, mixed with global uncertainty, seem to be weighing on some prospective buyers, Chief Executive Officer Ryan Marshall said this week in an earnings call.
“Demand has been a little choppier in the first few weeks of October, with more volatility in the day-to-day sales numbers,” Marshall said.
Typically, sales start to slow during this time of year, but the market’s seasonal patterns are being compounded by “the financial and the mental threshold of interest rates rising,” according to Ali Wolf, who tracks new-home sales as chief economist at Zonda.
“What has evolved, I think, is plain old affordability,” Wolf said. “There are not many people who have seen their incomes go up enough to match the fact that we continue to see prices go up and interest rates go up.”
The market’s been so tight over the past year that buyers who are able to cope with higher rates, or those paying cash, are seeing this pullback as an opportunity.
“From 6.5% to 8%, there have been some that have slowed down, but those that are serious lookers are still looking,” said Stephanie Beckwith, a Redfin agent in Atlanta. “Anything that’s absolutely move-in ready, it does go off the market real quickly.”
Melissa Cohn, regional vice president at William Raveis Mortgage, said she’s had clients come back to her recently, with the thought that buying at the peak of a rate cycle means they might get a better price. If rates fall, more buyers will flood back into the market, pushing up prices and chipping away at the limited inventory.
Cash also changes the equation, said David Harris, a Brooklyn-based agent at Coldwell Banker Warburg.
“I’ve had a number of buyers who have had the cash on hand so they were not as impacted by the interest rates and they were just like, ‘This is the opportunity to get something done — I have enough cash and let’s keep moving,’” he said.
Buyers who can afford to keep searching for homes are starting to see a bright spot when it comes to inventory. New listings rose 1.4% in September from a month earlier, the largest monthly increase that Redfin has reported since February 2022. Daryl Fairweather, the home-listing website and brokerage’s chief economist, attributed that to owners deciding they can no longer stay in their homes, even if that means giving up a 3% mortgage. Often, homeowners need to move because of some change in their lives, Fairweather said.
“There’s only so long people can stay in their homes before something in their life requires them to sell,” Fairweather said. “They’re worried about that possibility that because rates are so high now that prices will be lower or at least not go up next year. So that means that now would be a good time to sell.”
For many buyers using mortgages, the calculation of whether to buy remains complicated. Christina Singh, 38, is trying to sell her home in Firestone, Colorado, and purchase a property in a suburb north of Dallas.
She’s been aiming to spend between $650,000 and $780,000, but is struggling over the limited amount of homes for sale. The ones that are hitting the market are selling quickly, and higher rates are making her more skittish, especially when comparing current levels to the mortgage rate on her previous home.
“I got a really good deal on my home at 3.5%, and now seeing the interest rates around 7%, it’s just really scary,” she said. “There’s just so much unknown in the market.”
This article was provided by Bloomberg News.
